How to Answer “How do operating leases affect enterprise value and valuation multiples?” in Investment Banking Interviews
In investment banking interview prep, a common advanced valuation prompt is: “How do operating leases affect enterprise value and valuation multiples?” A strong answer shows you understand the operating leases impact enterprise value both mechanically (what changes in the numbers) and conceptually (why comparability matters across companies and periods).
Interviewers are usually looking for a clean bridge from accounting treatment to valuation: what moves in EV, what moves in EBITDA/EBIT, and how you keep multiples consistent when leases are capitalised.
What Interviewers Look For in Operating Leases Explained
First, they’re testing whether you can keep enterprise value definitions consistent. If leases are treated as a form of financing (which modern standards largely do), you should be able to explain why they belong in “debt-like items” and how that affects EV.
Second, they’re testing practical judgment on valuation multiples interview questions: you need to match numerator and denominator. If you add lease liabilities to EV, you should also use an earnings metric that is lease-adjusted (e.g., post-IFRS 16 EBITDA) or explicitly convert back to a pre-IFRS 16 basis for comparability.
Third, they’re testing whether you can translate “accounting” into “modeling.” In financial modeling interview prep, the expected skill is to outline how you’d normalise metrics across peers (different lease intensity, different reporting regimes, or different adoption dates) and sanity-check the implied valuation.
Operating Leases Impact Enterprise Value: Step-by-Step Framework
- 1
Step 1: Start with the definition and the consistency rule
Open by stating the principle: leases change valuation only through how we define and measure EV and operating earnings.
- Enterprise value is the value of the operating business funded by all capital providers, so debt-like claims should be included in EV.
- An operating lease is economically similar to debt: the company has committed fixed payments to use an asset.
Then give the headline: capitalising operating leases increases EV (by adding the lease liability) and typically increases EBITDA (because rent/lease expense is replaced by depreciation and interest), so EV/EBITDA may move less than either component alone—but the direction depends on lease intensity and the exact metric used.
Finally, flag comparability: in interviews you score points by saying you will keep the numerator/denominator on the same “lease basis” across companies.
- 2
Step 2: Explain the mechanics: what changes in EV, EBITDA, and EBIT
Walk through the three key lines in a way that sounds like you’ve done it in a model (this is where operating leases explained becomes useful).
-
EV adjustment: If leases are capitalised (IFRS 16/ASC 842), the balance sheet includes a lease liability. Many bankers treat this as debt-like and add it to EV (sometimes net of any associated lease-related cash if clearly earmarked).
-
Income statement effect: Under capitalisation, the historical “rent” operating expense is replaced by depreciation of the right-of-use asset and interest expense on the lease liability. That generally raises EBITDA (rent was above EBITDA; D&A and interest are below EBITDA). EBIT may change slightly depending on the split between rent vs D&A.
-
Cash flow timing: Total cash paid for the lease may be similar, but classification shifts (operating vs financing), which matters for certain yield/leverage metrics and for how people think about recurring operating costs.
-
- 3
Step 3: Tie it to valuation multiples and peer comparability
Now answer the “so what” for impact of operating leases on valuation multiples.
- EV/EBITDA: If you add lease liabilities to EV, you should generally use the lease-capitalised EBITDA (post-IFRS 16/ASC 842). Because both EV (up) and EBITDA (up) move, the multiple can be roughly similar, but not guaranteed.
- EV/EBIT or EV/EBITDAR: For lease-heavy businesses (retail, airlines), analysts sometimes use EV/EBITDAR (adding back rent) and add the present value of rent commitments to EV to make companies comparable.
- Equity value multiples (P/E): Lease capitalisation typically has less direct effect on equity value multiples, but net income can shift due to the interest/depreciation pattern (often front-loaded), which can change P/E in early years.
Close this step with an interviewer-friendly rule: “Whatever lease treatment I apply to EV, I’ll apply the matching treatment to the earnings metric so I’m not mixing pre- and post-capitalisation numbers.”
- 4
Step 4: Give a quick numeric example and a sanity check
Use a light example to prove you can do this under pressure.
Example setup: A company trades at 10.0x EV/EBITDA on reported numbers: EV = 1,000 and EBITDA = 100. It has operating lease commitments with a present value (or reported lease liability) of 200.
- If you treat leases as debt-like, EV becomes 1,200.
- If reported rent was 30 and now that’s replaced by D&A/interest, EBITDA might increase from 100 to 130 (simplified).
- New multiple: 1,200 / 130 = 9.2x.
Sanity checks you should say out loud:
- Lease-heavy companies often screen “cheaper” on EV/EBITDA post-capitalisation because EBITDA rises a lot.
- The goal is not to force a direction; it’s to standardise the basis across peers and time periods so the multiple is interpretable.
Analyst Model Answer for Valuation Multiples Interview Questions
Operating leases affect valuation mainly through consistency in enterprise value and the earnings metric you pair with it. If you treat operating leases as a financing-like obligation—which is broadly what IFRS 16 and ASC 842 do by putting a lease liability on the balance sheet—then I’d typically treat that lease liability as debt-like and include it in enterprise value.
Mechanically, capitalising operating leases tends to increase EV because you’re adding the lease liability, and it also tends to increase EBITDA because rent expense is replaced by depreciation and interest, which sit below EBITDA. So the impact of operating leases on valuation multiples like EV/EBITDA can be muted or mixed: both the numerator and denominator move, and the net effect depends on lease intensity and how much rent was being expensed.
In practice, the key is to avoid mixing bases. If I’m adding lease liabilities to EV, I’ll use a post-capitalisation EBITDA (or use EV/EBITDAR and add back rent if I’m comparing very lease-heavy businesses). If peers are on different reporting bases or adoption timings, I’ll normalise either to a pre-IFRS 16 view or to a fully capitalised view so the valuation multiple is comparable.
As a quick check, if EV is 1,000 and EBITDA is 100, adding a 200 lease liability takes EV to 1,200. If EBITDA rises to 130 after removing rent, the multiple falls from 10.0x to about 9.2x—illustrating why you have to adjust both sides and then interpret the result, not just say ‘EV goes up’.
- Lead with the rule: match the lease treatment in EV with the earnings metric.
- Name the practical adjustments: lease liability in EV; rent moving from opex to D&A/interest.
- Mention comparability across peers and reporting regimes (IFRS 16/ASC 842).
- Use one small example to show direction can vary by lease intensity.
- Avoid claiming the multiple always increases/decreases—focus on standardisation.
Common Pitfalls in Lease Adjustments and Peer Comparability
- Saying “leases increase EV” without also adjusting EBITDA/EBIT, which mixes numerator and denominator.
- Treating lease liabilities as always identical to debt without caveating that practice varies by team and sector.
- Forgetting that post-IFRS 16 numbers can break peer comps if some companies are effectively on different bases.
- Over-indexing on accounting detail (journal entries) instead of the valuation implication and comparability.
- Ignoring sectors where EV/EBITDAR or explicit rent capitalisation is commonly used for cleaner comps.
Follow-Ups: How to Discuss Operating Leases in Valuation Interviews
Do you always add the full lease liability to enterprise value?
Typically you add the reported lease liability (or PV of commitments) as debt-like, but practice can vary; the key is to be consistent with the earnings metric and peer set.
How do operating leases change EV/EBITDA versus EV/EBIT?
EBITDA usually increases more because rent is removed, while EBIT may move less due to depreciation replacing rent; that’s why EV/EBITDA often shifts more than EV/EBIT.
When would you use EV/EBITDAR?
For lease-heavy industries where rent is a major operating cost, EV/EBITDAR plus a lease/debt adjustment can improve comparability across different lease vs own strategies.
How does lease capitalisation affect leverage ratios?
It usually increases reported debt and can increase EBITDA, so Debt/EBITDA may not move one-for-one; net debt generally increases, affecting credit-style leverage views.
In a model, where do you find the data to capitalise leases if it’s not on the balance sheet?
You can use disclosed lease commitments in the notes, apply a discount rate assumption to estimate PV, and adjust EV and rent/EBITDA accordingly for comparability.
Financial Modeling Interview Prep: Drills to Make This Automatic
- Practise a 90-second version that leads with the consistency rule (match EV treatment to the earnings metric), then add the mechanics only if prompted.
- Build one quick back-of-the-envelope example (EV, EBITDA, lease liability, rent add-back) so you can show the multiple effect under pressure.
- Rehearse two “comp” lenses: post-IFRS 16 (lease liability in EV; higher EBITDA) and EV/EBITDAR (add back rent; capitalise rent commitments).
- In AceTheRound, run this as a mock technical: aim to explain the adjustment and comparability trade-off clearly, without drifting into journal-entry detail.
Ready to practice with AceTheRound?
Create an account to unlock AI mock interviews, feedback, and the full prep library.