Many investors can't tell the difference between depreciation and impairment. They can't be blamed for this because the difference is quite subtle. Stated simply, impairment is a one-off phenomenon but depreciation is a routine exercise. Depreciation leads to a reduction in the value of an asset at regular intervals, whereas impairment is a permanent charge that reduces the value of the asset forever.
The problem arises when a company charges a huge impairment expense or regular impairments or when it writes off a major asset. Such an impairment raises questions about the company's future growth prospects. Huge or regular impairments also indicate the reduced ability of the company to generate consistent cash flows and profits.
Impairment not only reduces the profits of a company but also leads to a reduction in its equity capital. Although this temporary inflates return on equity, an investor should not get fooled by it. Impairment balloons leverage ratios, thereby leading to a sudden increase in the debt-to-equity ratio of the company and makes it an even riskier investment. For instance, Tata Motors took a huge impairment of more than `27,000 crore a few months ago, which has led to a significant rise in its debt-to-equity ratio from 0.93 times to 1.76 times.
The table lists companies whose total impairment outgo over the last five years is at least 10 per cent of their net worth five years ago. In absence of this impairment outgo, their profits would have been higher.