Leasing has a significant impact on financial ratios in banking. Here are some of the ways leasing affects financial ratios:
- Debt-to-equity ratio: Leasing increases a company’s liabilities, which raises the debt-to-equity ratio. The leased assets are considered off-balance sheet financing, which means they are not included in the calculation of the debt-to-equity ratio. However, if the leased assets are included as debt, the debt-to-equity ratio will increase even further.
- Debt-to-asset ratio: Leasing increases a company’s total assets, which reduces the debt-to-asset ratio. However, since leased assets are considered off-balance sheet financing, they are not included in the calculation of the debt-to-asset ratio. If the leased assets are included as debt, the debt-to-asset ratio will increase.
- Return on assets: Leasing can increase a company’s return on assets since it allows the company to acquire assets without having to make a large capital expenditure. This can increase the company’s profitability, which in turn increases the return on assets ratio.
- Interest coverage ratio: Leasing increases a company’s interest expense, which reduces the interest coverage ratio. This ratio measures a company’s ability to pay interest on its debt, and a lower ratio indicates that the company may have difficulty meeting its interest obligations.
- Current ratio: Leasing can affect a company’s current ratio, which measures a company’s ability to pay its short-term debts. Leasing can increase a company’s current assets, which increases the current ratio. However, if the leased assets are included as debt, the current ratio may decrease.
It’s important to note that the impact of leasing on financial ratios may vary depending on the specific terms of the lease agreement, such as the length of the lease and the amount of the lease payments. Additionally, the impact may vary depending on the industry and the specific company’s financial situation.