'average remaining depreciable life...."

J

joselvelez

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I am looking at the footnotes for SLE's annual report and found this language:

'Based upon current levels of depreciation, the average remaining depreciable life of the net property is 5.3 years.'

I initially was thinking, 'ok this is useful life', but it seems more likely that what they are saying is that on average, their PP&E has about 5.3 years of depreciation left.

I take from this that:

1.) The company has a lot of old equipment that is at or nearing the end of its useful life

2.) Depreciation expense has been decreasing over time and thus may be inflating operating income

3.) A large amount of capital investment/expenditures may be looming in the future in order to replace outdated equipment.

4.) If significant capital investments/expenditures are coming, then current cash flows may not be accurately calcluated.

I am making a lot of assumptions here but I just want to know if I am on the right track. Do my assumptions make sense? Is my rationale in tact?

Thanks!
 
You have to look at the type of assets that they have, and how material is gross PP&E to their balance sheet.

If most of their equipment is baking ovens with a 7 year depreciable life then 5.3 is not bad. If it's buildings and leasehold improvements with 20+ years of life then its a bigger problem. You should be able to find a breakdown of asset categories aand depreciation policies in the 10K.
 
Thank you Super I.

I will look for the breakdown of asset categories and depreciation policies.

When you say that 5.3 is not bad for this particular example, how do you determine this. Are you guestimating with a general formula, like proportionality, or is this from experience.

Thanks again!
 
When I said 5.3 was not bad IF depreciable life was 7 years, it was more of an intuitive, gut feeling since it meant that the assets were only on average 25% depreciated (5.3/7 years means 75% of life left). Practically the only way to evaaluate this properly is to compare it to other companies in the same industry, and also see how it has changed over time for the company in question.
 
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