Hey guys,
If you are forecasting Depreciation as a % of Sales for 3-5 years in advance, how would you determine/ justify this percentage (in addition to just putting an average of the past years)
Thanks!
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Depreciation should be more closely linked with capex spend... more capex = more depreciation, less capex = less depreciation
Well I guess if capex is a % of sales ... and depreciation is a % of capex ... then depreciation can also be projected as % of sales ... just saying. Agree it should be capex and frankly depends on how much is new capex and how much is maintenance capex
To previous comments, yeah I understand that depr is more closely linked to capex, but % sales is not inaccurate in most cases. You could also build out a depr schedule if you want to be that accurate.
To op, if their past depr has been within a close range as % sales then that you can take the average of the past few years or take the last year's number. You can do a variety of things to project the number with. If it hasn't been within a close range then maybe that isn't the best way to project and maybe you should base it off of capex or something else.
I suppose in a generic model it looks like depr is a % of sales... and conceptually it may seem non-intuitive. If you do think about the intricacies involved you would realize that your revenues cannot really grow unbounded forever (every generic model assumes this) unless you actually invest in capex. So yes, there is a relation between depr (coz of capex) and revenues, though it may not always be as simple as depr = x% of revenues
I'd think a model that showed depreciation as % of sales was shitty. I accept the logic works while depreciation = function of capex = function of sales. However, if depreciation is linked to sales in the model and I sensitise the capex spend, depreciation expense would not adjust. That would be a shitty model. A shitty model that would make me shitty.
true... hence my use of the term 'generic model'... In real life, depending on the complexity/scale of the business one would have a separate model feeding in capex (& depr) schedules..
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