Average Gross Fixed Assets/Depreciation and Amortisation (Years)Companies can inflate reported profits by under-depreciating their assets. As such, we attempt to highlight companies which are depreciating their assets over a longer period relative to industry peers. As Figure 59 shows, depreciation differs considerably by sector. At one end of the scale, real estate developers and electric utilities depreciate their assets over more than 20 years, while software and IT companies are less than 10 years.
Our accounting screen is set to trigger a red flag when Average Gross Fixed Assets/Depreciation exceeds the 80th percentile relative to its GICS industry peers, and/or when there is an abnormally large increase relative to the normal rate of change amongst industry peers over one and three years. This latter red flag is triggered when the increase in Average Gross Fixed Assets/Depreciation exceeds the 80th percentile relative to the change experienced by GICS industry peers between 2010 and 2015.