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GLOSSARYTERMS AS A CREDIT DESK USES THEM

Capex-to-depreciation ratio

What is the capex-to-depreciation ratio, and what does it tell a lender?

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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// THE SHORT ANSWER

The capex-to-depreciation ratio divides a business's capital spending in a period by its depreciation charge, as a rough reading of whether it is renewing its assets as fast as its accounts say they wear out. A business spending US$3m a year against depreciation of US$5m scores 0.6 times, and several years like that can mean replacement deferred into a later bill. The ratio is crude: depreciation usually reflects historic cost and chosen asset lives, inflation lifts replacement costs above it, and under IFRS 16 lease depreciation enters the charge while new leases do not appear as capex, so a lender reads it beside the asset register.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// THE FULL PAGE

Capex-to-Depreciation Ratio: a Worked Example →

The accounts say the plant is wearing out. Is anyone replacing it?

// WHAT IT IS NOT

Maintenance capex is the spending needed to keep existing capacity working; this ratio is one test of whether that spending is being made, and it mixes in growth capex unless the two are split first.

// WORKED IN

// NEXT TO IT

READING THE NUMBERS

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