Guide to Analysing Companies

Deposit insurance
A safety net for those depositing their savings with banks. One
of the first deposit insurance schemes was set up by New York
State in 1829. Since then most developed countries have estab-
lished schemes that protect depositors from the possibility that
their bank will collapse. The risks can be real. During the
Great Depression in the 1930s, more than 10,000 (admittedly
small) banks in the United States went bust or closed their
doors. To protect savers from losing their money, the federal
deposit insurance corporation guarantees deposits up
to $100,000 should the bank fail. Savers’ deposits and those of
their families are aggregated so that the rules are applied fairly
between depositors. In the UK, depositors get back only a pro-
portion of their total savings.
Does deposit insurance encourage banks to be reckless with
their deposits? Yes and no. Evidence suggests that banks gen-
erally collapse in countries which have unstable economies (or
governments) and whose financial markets lack transparency.
Some countries, such as Germany, encourage banks to snoop
on each other to keep them on their best behaviour.
Deposit protection
An insurance scheme into which banks pay a premium to
protect depositors against loss should the bank go bust. Such
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schemes usually give limited protection, covering small
deposits up to a certain fixed amount and insuring larger de-
posits only up to that amount. This tempts big depositors to
spread their money around several institutions to get the
maximum insurance cover. The main argument against
deposit protection schemes is that they give badly run institu-
tions a competitive advantage. (See federal deposit insur-
ance corporation.)
Depreciation
The effect of the passage of time (wear and tear or technical ob-
solescence, for example) on the value of tangible assets such
as machinery; recognition that the value of an asset at one end
of an accounting year is different from its value at the other
end. Accountants deduct an amount from a company’s annual
profit to take account of depreciation.
There are three ways of calculating depreciation for the pur-
poses of a company’s books.
 The straight-line method. An estimated scrap value of
an asset at the end of its life is subtracted from the
original cost. This is then divided by the number of years
of useful life that the asset is supposed to have. For
example, a computer bought for $1,000 with a five-year
life would be depreciated at the rate of 20% a year:
Year
Annual depreciation ($)
Year-end value ($)
1
900 
 20%  180
1,000 
 180  820
2
900 
 20%  180
820 
 180  640
3
900 
 20%  180
640 
 180  460
4
900 
 20%  180
460 
 180  280
5
900 
 20%  180
280 
 180  100
 The reducing balance method. A fixed percentage of
the value of an asset last year is set aside out of profit
each year.
 The inflation-adjusted method. This tries to take