Two identical companies, one finances assets with capital leases, the other with operating leases. Which is the better investment based on EV/EBITDA?

Question

IBPrep · Accepted Answer

Pre-ASC 842 historical answer: the capital lease company would appear to have a LOWER EV/EBITDA multiple because depreciation + interest from capital leases sit BELOW EBITDA, while operating lease expense sits IN EBITDA. So capital lease company's EBITDA is artificially higher → lower multiple.

Two identical companies, one finances assets with capital leases, the other with operating leases. Which is the better investment based on EV/EBITDA?

Answer

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