Depreciation
Depreciation is the allocation of a tangible asset’s cost over its useful life — a non-cash expense that still points at replacement capex.
Definition
Cost is spread by straight-line, units-of-production, or accelerated methods. Tax books and GAAP books often differ (deferred tax). The cash left when you bought the asset; depreciation is the later matching.
Why it matters
EBITDA adds it back as if assets do not wear out. In capital-heavy names, depreciation is a hint about maintenance capex, not a free add-back.
Case
An airline’s D&A undershoots economic fleet replacement. EBITDA looks rich; hangar capex does not. The ‘quality’ of earnings was the useful-life assumption.
How to read it
Compare D&A to capex over a cycle. If capex lastingly exceeds D&A, the firm is growing or the lives are too long.