Depreciation Add Backs on a Rental Business

February 12, 2026

by a searcher from New York University - Leonard N. Stern School of Business in New York, NY, USA

I’m currently evaluating a rental business that depreciates its rental assets over a very short period (less than two years). As a result, EBITDA looks strong, but ongoing maintenance CapEx is relatively high. In a rental-heavy business like this, is EBITDA the appropriate metric to estimate cash flow or would a more accurate proxy for cash flow be EBITDA minus maintenance CapEx? I’d really appreciate your thoughts.

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Reply by a professional
from Liberty University in Fort Myers, Florida, United States

Hey Bradly, I previously worked in corporate accounting for Hertz and a larger public manufacturing company. Both of those companies had a large amount of depreciation expense each year, and it was very odd to me that investors still used EBITDA as the metric. You would think that something so critical to the business would be part of the main profit metric used by investors. There are two thoughts I have around why investors still look at EBITDA###-###-#### Depreciation does not show the true value of the assets. Macy's is a classic example where they have a large building in NYC that is fully depreciated, but obviously worth a lot of money. Think of how their financials would have looked with that last year it was deprecated vs the next year when nothing remained. There would be a pick up, but there is no underlying benefit to the company in the next year. (2) It is a noncash expense. Similar to the first point, it does not really show what the business is expending each year. If you are going to invest in a company with brand new machinery that has a lot of depreciation expense, you would likely pay more for that company, than one with little to none depreciation expense that will need some replacements (all other factors being equal). The above is more for larger companies, but the reasoning is even more impactful in the SMB deals I see for QOE. Most people will see large changes in depreciation expense between time periods, which will cause net income to change drastically between time periods (while there is no change in the real profitability for the company). I recommend people to look at EBITDA still, but make sure you know and understand the CapEx needs each year. The SDE/ADJ EBITDA is not your earnings/cash flow, but the starting point where you can calculate it after that. You'll obviously have to factor in other things like interest, principal repayments, etc into the SDE/EBITDA vs your actual post close cash flow. I have a model I walk my clients through to help them understand this in our QoEs as well. Happy to talk through in more detail if you have follow ups.

Reply by a professional
in Austin, TX, USA

Bradley, from a CPA and operator perspective, I’d be cautious relying on EBITDA alone in a rental-heavy model like this. When you see very short depreciation lives, it’s usually a signal that capital is cycling quickly through the business. EBITDA strips out depreciation, but if those assets actually need frequent replacement, that depreciation is pointing to a real economic cost, not just an accounting adjustment. In situations like this, I tend to think about EBITDA as a starting point rather than a proxy for cash flow. A more realistic view of sustainable cash generation is typically EBITDA less maintenance CapEx, because that reflects the capital required just to keep the business operating at its current level. The key distinction I try to make is: Is the CapEx growth-oriented or is it required just to stand still? If the majority of CapEx is replacement or maintenance, then EBITDA will almost always overstate what’s actually available to distribute or reinvest elsewhere. A few things I’d dig into: How closely does long-term CapEx track depreciation What happens to utilization or revenue if replacement CapEx slows down Whether the short depreciation life reflects true asset wear or simply an aggressive accounting policy Historical maintenance versus expansion CapEx trends In capital-intensive rental businesses, buyers and lenders I’ve worked with usually shift quickly toward EBITDA minus maintenance CapEx or normalized free cash flow once they understand the asset cycle. So yes, EBITDA is helpful for comparability, but I’d anchor on post-maintenance cash flow to understand the real economics of the business.

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