Analyzing Pre-depreciation Profit
The pre-depreciation profit is one of the methods of analyzing how a company is performing.
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For successful stock trading and investing, you must study the health of stocks. The health of a stock is measured in terms of earnings and the profit the company is making. There are different kinds of profit to be measured to understand the different aspects of the company’s performance. One of these is the predepreciation profit. Earnings Before Non-cash Expenses Pre-depreciation profit basically refers to earnings calculated before the non-cash expenses. These non-cash expenses come as items in a separate income statement. There isn’t any actual cash being spent on them. The costs of depreciation are usually allocated on the basis of a particular percentage, which depends on the method of depreciation used. As the term suggests, pre-depreciation profit is profit before depreciation and the non-cash expenses. Depreciation allocates the tangible asset cost over the useful life of the asset. The depreciation is for tax purposes and accounting. It is for the period when you expect the asset to be used, immediately after the asset is pressed into service. Other Expenses in Pre-depreciation Profit Calculation There are other expenses included in the pre-depreciation profit calculation though, including employee salaries, rent, expenses related to marketing, etc. The method of calculating depreciation does vary though, as does the time period for which the asset is depreciated. Straight-line techniques or declining balance are among the other depreciation methods. These recognize an asset’s wear and tear, and declining value. The convenience of pre-depreciation profit is that calculating it is relatively easy. All you need is the income statement. Based on the statement, analysts and investors can get the pre-depreciation profit calculated as a quick measure of cash flow. Benefits of Pre-depreciation Profit The reason for calculating pre-depreciation profit is it provides a better way to determine the ability of a company to service debt. It is a measure of the actual www.tradezero.co
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cash flow of a company. Pre-depreciation profit would reveal a higher profit, since depreciation keeps reducing the value of the company’s equipment. Non-expense stuff can bring down the reported earnings of a company. Machinery, buildings, vehicles, furniture, etc. are also depreciable items. The non-cash expenses do not actually involve any cash exchange, but the income statement does report them. Depreciation is the most common of these. These noncash items do affect the taxable income and income statement. The depreciation expense would appear on the company’s income statement as a noncash expense each year during the period of depreciation. Thereby, it would reduce the taxable income while not appearing on the cash flow statement. Contrasting Pre-depreciation Profit and EBITDA Pre-depreciation profit can be taken as a measure of profitability before the noncash charges, unlike EBITDA (earnings before interest, taxes, depreciation and amortization). EBITDA is a measure of profitability including the actual cash charges. It is also called operating profit and refers to earnings before the non-cash depreciation, while also excluding the interest from the actual cash charges and tax.
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