Depreciation: Case study

The various financial statements are of critical importance to investors and financial managers alike. Depreciation is not a cash expense like Labor and material costs; it is simply a bookkeeping entry on the Balance Sheet and on the Income Statement. Depreciation is deducted when computing net income, but it is not an actual cash outflow. Thus, we add it back to net income when determining the amount of cash the firm has generated.

For a case study, we will use PT XL axiata as an example. PT XL Axiata Tb (EXCL) is a telecommunications services and/ or telecommunications networks company. The Company commenced its commercial operations in 1996. The Company’s majority shareholder, Axiata Investments (Indonesia) Sdn. Bhd., is a wholly owned subsidiary of Axiata Investments. With the market value of 21.352 billion IDR, PT XL Axiata is the second largest Telecommunication provider in Indonesia.

From an investment standpoint, there is important trait that the telecommunication industries have,It has a virtual surety of tremendous growth ahead. Here is an area where annual growth rates are maintained year after year that elsewhere in the financial world would be incredible But as in the fierce competitive struggle in a tropical jungle, many of these exotic
growths can fade about as quickly as they bloom.

During 2007 to 2009, PT XL axiata was going through transformation to upgrade existing telecommunication signal capacity and coverage and investment in data transmission technology.

After  a few years, this company took the lead in the commercial development of the
telecommunication service provider. 

 

Table above shows the income statement for a PT XL axiata.  During 2008 period, the company managed to had its revenue and EBITDA increase 46%. But after EBITDA had adjusted for other other sources of income or expenses, the company had -15 billion IDR net income.

The company used depreciation methods to add the depreciation back to net income, therefore the company managed to have 3,379 billion IDR amount of cash which enable them to invest on data transmission technology and took the lead in Indonesian commercial telecommunication service provider.