Deferred Tax Liability conversion to equity

[keep_running]

When a growing firm reports a higher depreciation expense for tax reporting, why does this turn the liability into an equity value?
How does growth of the firm translate into a temporary difference becoming a permanent difference?

 

[S2000magician]

To be clear, the liability doesn’t change to equity.
What’s happening is that the analyst chooses to treat the liability as if it were equity.
The idea is that the liability won’t be paid within the foreseeable future, so, for analysis purposes, it’s closer to equity than a true liability.

 

[keep_running]

How come the liability will not be paid? Isn’t the firm growing?

 

[S2000magician]

Exactly.
Which means that they’re buying new PP&E, and depreciating it using accelerated depreciation for taxes and straight-line depreciation for financial statements.
Which means that their DTL from temporary depreciation differences will continue to grow for the foreseeable future. If the liability keeps growing, then the net effect is that they’re not paying it.