Operating Lease vs ROIC

Translation for Professionals:

The capitalization of operating leases significantly impacts ROIC. On one hand, it increases NOPAT by the implied interest rate, while on the other hand, it also increases Invested Capital.

According to American standards, the capitalization of all operating leases is required, making it relatively straightforward to extract figures for valuation. Additionally, as I understand, this practice also applies to standard real estate leases if the contract exceeds one year. I believe the same should be considered when evaluating a Georgian company.

During capitalization, the payments stipulated by the contract are discounted for balance sheet recognition, with the interest rate calculated in accordance with 10-year loans rated AA.

Source:

#VALUATION – Measuring and Managing the Value of Companies
7th Edition
McKinsey & Company
Tim Koller, Marc Goedhart, David Wessels