04-24-2014, 11:40 PM
(This post was last modified: 04-24-2014, 11:46 PM by earthtodan.)
(04-24-2014, 09:26 AM)Dividend Watcher Wrote: After re-reading this I think I now know why my classes required frequent breaks to keep them awake.
I've had plenty of coffee today, so no problem there. I've been on the road for a couple of days so I haven't had time to get back to this discussion, but it has changed my understanding of depreciation. The P/E ratio isn't strictly the comparison of price to earnings, but an attempt to smooth out or amortize the affect of large expenditures over time.
I realized in my KMI example above that interest is a separate cost on top of depreciation, and EBITDA isn't that relevant to the discussion since that includes cash expenses, so I made it too complicated. However I wonder over how long the depreciation on a pipeline network is amortized. It's probably quite a while.
The explanation of lawsuit accounting makes sense. BAC has been setting aside a lot of money to cover possible legal expenses and fines, and it was deducted from their recent earnings statement even though none of it has been settled.
So, a company makes a big expenditure, the balance sheet stays the same (i.e., balanced), the debt goes up and the reported earnings are held down while the expense is recognized as depreciation over the expected life of the asset. I'll try to remember that and see how long it takes to become intuitive.