Non-cash charges lower earnings without immediate cash impact; add them back when assessing cash flow but consider their economic meaning.
Published: 2025-12-20
Definition
Non-cash charges are expenses that reduce net income without consuming cash in the period. Examples: depreciation, amortization, impairments, stock-based compensation, and certain provisions.
Why it matters
They distort the gap between earnings and cash flow. While you add them back to estimate operating cash, some (like stock-based comp or recurring impairments) can still dilute or erode value.
Where to apply it
In cash-flow and earning-power analysis: add back non-cash charges but adjust for economic reality (e.g., maintenance capex for depreciation-heavy businesses, dilution risk for stock-based comp). In asset-based valuation, be cautious if frequent impairments signal overstated assets.