Can’t keep these straight in my head. Is someone able to do a quick breakdown of the benefits / negatives of capital and operating leases? Profibility Ratios Net Income CFO CFI Debt Equity Taxes
Profibility Ratios Capital Net Income increase CFO higher CFI lower Debt higher Equity higher Taxes lower Is it something close to the truth?
The main idea is that capital leases look worse on all accounting ratios and net income in the early years. Mostly because of the larger amount of assets and liability on the company’s balance sheet.
I’m digging through notes now. So far… OP Leases - NI: Hit by stable annual rent exposure - Tax: Unchanging - Leverage: Unchanging: - CFO: All interest expense - CFF: No Impact - ROA: Better because less assets on b/s Cap Leases - NI: Lower in early years due to higher interest expense as lease is amortized - Tax: Initially lower - Leverage: Higher - CFO: Higher, as only interest portion of lease expense included - CFF: Lower, as hit by amortization of lease - ROA: Worse because of more assets on b/s
For a lessee a capital lease gives… Higher assets and liabilities therefore lower asset turnover, current ratio, ROA (earnings lower and assets higher) and ROE (earnings lower) Lower NI in early years as interest and dep together give a higher expense than an op lease. This gives a lower profit margin (total reported expense for a cap lease is higher than the lease payment). Higher profit margin in the later years. Higher CFO, Lower CFF but total CF is the same D/E is higher - interest cover is lower as an interest expesnse is created by a capital lease Opposite true for operating lease…hope makes sense!
Thanks. THink i got em