CapEx To Depreciation and Amortization (SM.Capex_DA)

CapEx To Depreciation and Amortization (SM.Capex_DA) measures where does a company stands in its investment cycle. When a new investment is made, capex goes up, then it is expensed over time. Longer term, Capex/D&A should converge towards 1.0. A company in expansion usually needs to increase Capex at a faster pace than it depreciates older assets it already owns. This is to meet higher demand and deliver higher revenue.

Therefore, when revenue is rising, Capex/D&A tends to trend up. A red flag calling for scrutiny is if revenue is increasing and Capex/D&A remains flat or declines; this suggests under-investment. Lower sales but rising Capex/D&A suggests over-investments and spells trouble.

It can be shown as- “ CapEx (SM.Capex) / Depreciation & amortization (SM.DA_Exp)”.