Effects of Including / Excluding Leases in the EV
Hi,
I have a question regarding operating and capital leases and would greatly appreciate any help.
It is common practice to include capital leases in the EV. If I do so, I do not exclude the depreciation cost related to the capital leases from the EBIT, when using multiple valuation, right? When using a DCF, I exclude the payments related to capital leases from the FCFF, though. Correct?
Some analysts also include the PV of operating leases in the EV. In this case one should convert the operating leases into depreciation and interest cost, when using multiple valuation. So I basically adjust e.g. the EBIT by adding back the notional interest charge. Right? When using a DCF, I exclude the lease payments for operating leases from the FCFF, correct?
So, if I see an EV/EBITDAR multiple, this basically means that operating leases are included in the EV, right?
Just to make sure my thinking process is correct: Whether I include or exclude e.g. the PV of operating leases in the EV / in the EV-Equity-bridge shouldn't (in theory) really affect the EV-multiples, right? For example in the EV / EBITDA multiple both the numerator and denominator would accordingly increase.
What are reasons to include / exclude capital leases and operating leases in the EV?
Thanks a lot for any help.
Nobody?
I would really appreciate any input.
Don't want to say something wrong, but
With capital lease, you have a switch in the ownership of the assets, because you use it for 75%+ of its useful life. for this reason, you deal with it as it would be a debt. (you are financing your asset through a liability). But you can still use the EV/EBITDA.
You esclude or include the D&A in your valuation based on what you are looking for, but you are not obliged to use EBIT rather than EBITDA only because you have a Cap Le
Op Le has to be treated as a rent expense (you don't own the asset!!) - thus I don't see the reason to add the PV within your EV
if you see and EV/EBITDAR is because you are evaluating the operations of a Company and you think rent or restructuring expenses are high and are diverting from your main goal (evaluating the OPERATIONS). For this reason, it is widely used for Airline companies. But no, it doesn't mean OP LE are included in the EV
Thanks a lot for your reply! I greatly appreciate it.
However, I have read contradictory statements in some books and articles (e.g. on the capitalization of OLs http://pages.stern.nyu.edu/~adamodar/New_Home_Page/valquestions/debttos…).
Let's wait for some more opinions on this. :)
In my experience (having worked on one airline deal previously), when using EV/EBITDA and EV/EBIT multiples you don't include operating leases within EV.
However, when using an EV/EBITDAR multiple, operating leases should be capitalized and included within EV. This is often done by multiplying the annual operating lease charges by the average remaining lease length (7 or 8 years is fairly normal).
If you think about this conceptually, in general you use EV/EBITDA multiples (rather than, say, EV/Earnings) because EV is the value to ALL stakeholders (equity holders + preferred equity holders + debt holders), and EBITDA is a measure of the earnings available to ALL stakeholders (equity holders + preferred shareholders + debt holders) - i.e. you're comparing apples to apples.
But if you add operating lease charges to the denominator, your denominator now reflects the earnings available to (equity holders + preferred equity holders + debt holders + operating lessors). Therefore in order to continue comparing apples to apples, you need to add the value of the capitalized operating leases to the numerator as well.
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