Depreciation is a non-cash charge in which fixed assets are written down periodically. The effect of this is that it reduces the income within the income statement. Since depreciation is a non-cash charge, studying the income of a company is not sufficient. One also has to look at the cash flow statement of the company and study its cash flows. Some companies may have a negative income(loss) but have positive cash flows.
Companies with a large fixed asset base usually have higher depreciation charges which serve to reduce net income figures. These fixed assets are classified as plant, property machinery and equipment.
Studying net income figures must be complemented with the analysis of the company’s cash flow as some companies have high depreciation charges due to its large fixed asset base.
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