We know that under Indirect method of calculating Operation Cash Flow, "Depreciation" should be added to Net Profit as it is "Non Cash Expense" for the company. We don’t see any reason to discard this view because by simply posting Depreciation to P&L, there is no "REAL" cash outflow in current period, if the Asset was purchased few years ago.
Anybody who happens to read all time success investor “Warren Buffett” in his famous book “Essays of Warren Buffett, Lessons for Investors and Managers” will start to doubt this practice.
In this own words:
“Trumpeting EBDITDA is a particular pernicious practice. Doing so implies that depreciation is not truly an Expense, given that it is a “non-cash” charge. That’s nonsense. In truth, depreciation is a particularly unattractive expense because the cash outlay it represents is paid up front, before the asset acquired has delivered any benefits to the business. Imagine, if you will that at the beginning of this year a company paid all of its employees for the next ten years of their service (in the way they would lay out cash for a fixed asset to be useful for ten years) In the following nine years, compensation would be a “non-cash” expense – a reduction of a prepaid compensation asset established this year. Would anyone care to argue that the recording of the expense in years two through ten would be simply a bookkeeping formality?
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