Hello Georgi,

I am not sure which part of my article to which you are referring. I am guessing it is the last paragraph. Your comment is vague so I also need to infer what you were meaning. Probably, you are wondering how depreciation - a non-cash expense affects free-cash flows - yes? Normally, you would be correct but only after assuming the following:

1) That, as an accountant, you have the insider's view of the financial statement. The analyst is a slave to what is reported, whereas the accountant is not. So you know the real number for actual depreciation, and you may have insight about how that number relates to actual economic depreciation.

2) That the depreciation is reported correctly and not fraudulently reported. The very point of my comment was that the company was playing games with the useful lives calculation (most likely fraudulently). Given that likelihood, that does affect your calculation of free-cash flow because depreciation is an add-back to free-cash flow. Garbage in, garbage out.

3) That depreciation, being a non-cash number, is not an economic number. As an investor in a business, the viability of the business as a going concern is crucial. If a company plays games with depreciation it has long-term free-cash flow ramifications because of its economic ramifications. Said another way, analysts do not have the luxury of single period calculations, we have to make assumptions about the future, too, and usually based on the information generated in our financial statement analysis. Is your comment anchored in a one-period evaluation? I am guessing so, or you would have understood the ramifications of a bad depreciation report on future free-cash flows more clearly.

4) Many analysts (and accountants, in my experience) in their free-cash flow calculation assume operating capex is the same as depreciation. Play games with depreciation and an analyst will be surprised when capex differs significantly from depreciation. Again, it is a half-truth that depreciation is a non-cash expense. It is a non-cash expense until the asset wears out and has to be replaced. And, again, you have to have a more than one-period view of the financial statements. Are you, as an accountant, mired in financial statement preparation for this quarter, until the next quarter needs to be prepped, until the next one, too? Are you simply noting things after the fact, and not thinking about future ramifications? It is my experience that accountants frequently misunderstand the interpretation of financial statements and their ramifications for the future value of a business because of their anchoring on past periods or, at best, the current period.

Best wishes for success to you! Again, thank you for your comment.

Jason