Depreciation, Amortization and EBIT3:51 with Michael Watson
We describe the Depreciation, Amortization and EBIT line items, and dive into the difference between depreciation and amortization.
Depreciation and amortization 0:00 are actually some of the more interesting topics in accounting in my opinion. 0:03 Think about what depreciation is. 0:08 It's an expense that shows the reduction in value of an asset. 0:11 There are tons of articles, and papers, and polices about depreciation. 0:15 But for us, just know, it's an expense related to an asset reducing in value. 0:20 A company will likely depreciate different items over different time frames. 0:26 Maybe a computer is depreciated over three years, but 0:31 a piece of factory equipment is depreciated over ten. 0:34 It depends on the situation. 0:38 The depreciation expense on the P and L is the sum total of all depreciation for 0:41 the business's assets over that period. 0:46 Amortization is used to describe some different things in accounting, but 0:50 in this situation and generally speaking, when you are saying just amortization, 0:54 full stop, instead of saying amortizing revenue or amortizing debt. 0:59 Amortization usually refers to the same thing as depreciation, except that 1:05 depreciation is the reduction in value of a tangible asset that you purchased. 1:10 Amortization usually relates to an intangible asset. 1:16 I know, crazy, right? 1:21 People put a value to something you can't touch on the financial statements. 1:22 That's a topic for another day, but I'll just give you a few examples, real quick. 1:27 Think about a brand like Coca-Cola, there is a lot of value in that brand. 1:33 It's known all over the world. 1:38 People pay a premium for Coca-Cola over the no name brand that is also 1:41 available at the grocery store, so there is value in the brand. 1:45 Another example is something known as goodwill in accounting. 1:51 If I buy a business for more than its book value, and 1:55 the difference between the purchase price and book value is known as goodwill. 1:59 We'll talk about book value more in the next stage of this course, 2:05 so don't get stuck on what book value is. 2:08 For now, 2:11 just leave it as the value the financial statements say a business is worth. 2:11 However, businesses strategically acquire companies at a premium regularly. 2:16 Think about Facebook's purchase of Instagram, 2:22 that was a huge deal at the time. 2:25 They paid $1 billion for Instagram, 2:27 lots of people were going crazy when that happened. 2:29 But, the general consensus now is that it was an extremely smart and 2:32 good value acquisition. 2:37 Anyhow, the book value of Instagram was definitely not $1 billion 2:39 when Facebook acquired it. 2:43 Facebook has made a lot of acquisitions over the years. 2:45 And if you look at the balance sheet, you can see at the end of 2017, 2:49 they had over $18 billion of goodwill on their balance sheet. 2:52 Again, we'll come back to that in the next stage. 2:58 Okay, circling back to amortization, 3:01 though, at regular intervals, a company has to do a valuation exercise 3:03 on their intangible assets to see if they have gone down. 3:08 If they have, 3:12 then this is where the business will put an amortization charge on their P and L. 3:13 As I said earlier, there's a lot of detail one could go into on the topics of DNA. 3:19 But in the interest of time, we'll move along to earnings before interest and 3:24 taxes, or EBIT. 3:29 This is another measure of profit, similar to EBITDA, except depreciation and 3:32 amortization have been taken off. 3:37 There is also, surprise, surprise, an EBIT margin metric that some folks track. 3:40 Sometimes EBIT will be labeled as operating income on the P and L. 3:46
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