A profitable company has chosen to lease its assets.With respect to ROIC,capital productivity,and operating profits,which of those measures are likely to artificially rise?

Question

Quizplus · Accepted Answer

A company that chooses to lease its assets will have artificially low operating profits because rental expenses include an implicit interest expense. The company is likely to have artificially high capital productivity because the assets do not appear on the lessee’s balance sheet. Although these two effects counteract one another, the net effect is an artificial boost in ROIC because the reduction in operating profit by rental expense is typically smaller than the reduction in invested capital caused by omitting assets.

A Profitable Company Has Chosen to Lease Its Assets