How does increased depreciation affect a company's valuation?

Increased depreciation generally leads to a decrease in a company's valuation. Depreciation affects financial statements by reducing taxable income, which lowers cash flows in the short term despite tax savings. A higher depreciation expense can indicate that a company's assets are being treated as less valuable over time, which often leads to lower net income figures on the income statement.

When calculating a company's valuation through methods like Discounted Cash Flow (DCF), a decrease in net income can impact the cash flows available for valuation purposes. While it's true that depreciation itself is a non-cash expense and could offer some tax benefits, the overall impression of increasing depreciation is that it signals a reduction in the asset base and profitability, ultimately leading to a lower valuation.

Valuation typically reflects the present value of expected future cash flows, and if those cash flows are projected to decrease due to increased depreciation, the valuation would likely decrease as well. Therefore, the understanding here is that while depreciation has some tax advantages, its overall effect is negative on the company's valuation in most scenarios, making the correct interpretation point towards a decrease rather than an increase.