Glossary
Amortization
Spreading the cost of an intangible asset, or the repayment of a loan, over a series of periods instead of all at once.
Amortization has two related meanings. In accounting it is the gradual expensing of an intangible asset, such as a patent, a customer list or software, over its useful life. In lending it is the paying down of a loan's principal through scheduled installments. Both spread a large amount across many periods, and both show up in figures investors use every day, from EBITDA to mortgage payments.
Amortization of intangibles
When a company buys a patent for $10 million that it expects to be useful for 10 years, it does not record a $10 million expense at once. On a straight-line basis it books $1 million of amortization expense each year, and the patent's carrying value on the balance sheet falls by the same amount. This is the intangible-asset twin of depreciation, which applies to physical assets.
Amortization is a non-cash expense: the cash went out when the asset was bought. That is why it is added back on the cash flow statement and excluded from EBITDA. Under US GAAP, goodwill and other indefinite-lived intangibles are not amortized for public companies; they are instead tested for impairment.
Loan amortization
A fully amortizing loan has equal payments, but each payment's split between interest and principal changes over time.
Why it matters to investors
Companies that grow through acquisitions often carry large amortization charges, which depress GAAP earnings. Many report adjusted, non-GAAP figures that exclude them. Both views are useful, but remember that the acquisitions behind the charge cost real money.