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How to read operating lease liabilities | Quantery Blog

October 26, 2026 · 7 min readfundamentalsbalance-sheetleases

An operating lease liability is the present value of rent a company has committed to pay under its leases. Read it beside the right-of-use asset and the lease footnote. The liability shows the remaining contractual claim; the asset shows the accounting right to use the property or equipment.

For a lease-heavy business, debt alone can understate fixed obligations. But adding every lease liability to debt can break a screen in the other direction. Keep the conventional leverage measure, build a lease-adjusted version next to it, and test whether the adjustment improves the thesis.

What is an operating lease liability?

A lease lets a company use an asset it doesn't own. A retailer may rent a store, an airline may lease an aircraft, and a distributor may lease a warehouse. The contract commits the company to future payments even though no bond was issued and no bank loan appears.

Under current US accounting, most operating leases create two balance-sheet entries:

• A right-of-use asset represents the company's right to use the leased property during the contract.
• An operating lease liability represents the discounted value of the unpaid lease payments.

The liability is usually split between the amount due within the coming year and the amount due later. Those pieces may appear as separate balance-sheet lines or sit inside broader current and noncurrent liability captions. The reconciliation lives in the lease note. The FASB lease standard is the underlying rule; a company's filing shows how its own contracts were measured.

Don't expect the asset and liability to stay equal. They begin from related calculations, then diverge as rent is paid and the asset is reduced. Prepaid rent, landlord incentives, acquisition accounting, and impairment can widen the gap. A gap is a reason to open the note. It isn't proof that either number is wrong.

This is another stock-and-flow distinction. The liability and right-of-use asset are snapshots at the reporting date. Lease cost covers a period. If that distinction feels slippery, start with how the three financial statements fit together.

Where do the lease numbers come from?

Start with the balance sheet, then move straight to the lease footnote. The footnote should let you connect four different views of the same contracts.

Recorded liability. This is a present-value number. Future payments are discounted because a payment due years from now isn't equivalent to cash due now. The company uses the rate implicit in a lease when it can determine that rate; otherwise it estimates an incremental borrowing rate.

Maturity schedule. This lays out future contractual payments by period. Its undiscounted total will normally exceed the recorded liability. The note then subtracts imputed interest to reconcile the schedule to the balance-sheet amount.

Right-of-use asset. This is an accounting asset, but don't read it like owned property that can automatically be sold to repay creditors. It represents access under a contract. Its value to the business depends on the location, the economics of the contract, and whether the asset is still useful.

Lease cost and cash paid. The income statement generally recognizes a single operating lease cost over the lease term. The cash flow statement shows the payment effect, while the footnote supplies the bridge that the face statements can't fit. Read all of them before designing a coverage ratio.

The terms matter too. Renewal options can change the measurement, as can variable rent tied to sales or usage. Two companies with similar storefronts can therefore report different lease liabilities because their contracts and assumptions differ.

Starbucks shows why the footnote matters

Starbucks is a useful public-record example because almost all of its company-operated stores are leased. In its fiscal 2025 Form 10-K, the company reported a current operating lease liability of $1.5645 billion and a noncurrent operating lease liability of $8.9722 billion. Together, those balance-sheet claims were $10.5367 billion at the fiscal year-end.

The same filing reported a $9.3157 billion operating lease right-of-use asset. That amount doesn't cancel the liability for leverage analysis. Starbucks needs the stores to operate, and the accounting asset isn't a cash reserve. The difference between the two balances also shouldn't be treated as a hidden loss without reading the reconciliation.

Starbucks reported $2.097 billion of operating lease cost for the fiscal year and $12.3892 billion of undiscounted operating lease obligations at year-end, excluding taxes, insurance, and related expenses. The spread between that commitments total and the recorded liability is exactly why a reader shouldn't lift one lease number from a filing and assume it answers every question.

The example doesn't establish that Starbucks carried too much or too little lease exposure. It establishes that a debt-only ratio leaves out a large contractual claim for this kind of business. Whether the omission matters to a thesis is testable.

Should operating leases count as debt?

It depends on the question.

If you're asking how many fixed claims stand ahead of equity, lease liabilities belong in the conversation. Stores can close and contracts can be renegotiated, but weak revenue doesn't make either happen. Rent still has a due date. A lease-adjusted net-debt measure can expose a burden that ordinary net debt misses.

If you're comparing a tenant with a company that owns its properties, adding leases can also make the capital structures more comparable. The owner may carry mortgage debt and depreciation. The tenant carries lease liabilities and rent expense. A plain debt ratio treats those choices very differently even when the underlying operations resemble each other.

But the adjustment must be consistent. Adding lease liabilities to the numerator while leaving the earnings measure unchanged may penalize the tenant twice, because operating lease cost already reduced operating profit. Analysts sometimes use rent-adjusted measures for that reason. Those measures require more judgment, and the definitions aren't interchangeable.

Keep both views:

• Reported leverage answers how the company looks under the ordinary debt definition.
• Lease-adjusted leverage asks what changes when contractual rent is treated as financing-like.
• Lease burden compares annual lease cost or cash payments with an operating measure that can support them.
• Asset intensity checks whether a high liability reflects a viable operating footprint or a shrinking business stuck with space.

A useful adjustment should change how you investigate companies. If it only rearranges ranks without clarifying the claim, it has added machinery and no insight.

How can a screen include lease exposure?

Begin with the smallest possible change. Preserve the original leverage feature and add one lease-adjusted feature. Don't rewrite the whole thesis around a newly discovered line item.

The shape below is illustrative, and the bundled templates are the reference for exact fields. It shows the decision clearly enough to test:

# Lease-adjusted balance-sheet risk, illustrative
params:
  lease_assets_watch: 0.25
  adjusted_claims_watch: 0.30

features:
  operating_lease_liability:
    operating_lease_current + operating_lease_noncurrent
  reported_net_debt:
    total_debt - cash
  adjusted_net_debt:
    total_debt + operating_lease_liability - cash
  lease_to_assets:
    if(total_assets > 0, operating_lease_liability / total_assets, null)
  adjusted_claims_to_assets:
    if(total_assets > 0, adjusted_net_debt / total_assets, null)

criteria:
  lease_exposure:
    - { when: "lease_to_assets <= $lease_assets_watch", score: 1 }
    - { else: 0 }
  adjusted_balance_sheet:
    - { when: "adjusted_claims_to_assets <= $adjusted_claims_watch", score: 1 }
    - { else: 0 }

gate:
  - total_assets > 0
  - operating_lease_current != null
  - operating_lease_noncurrent != null

The null rules are deliberate. Missing lease fields shouldn't earn a clean-balance-sheet score. They also shouldn't be replaced with zero. Route missing observations to review, and check the filing before deciding whether the company has no material leases or the structured data missed the disclosure. The same discipline applies to missing data in any stock screen.

Sector context matters. A store network built on rented sites will naturally look different from a software company with a small office footprint. Compare like with like, or test the lease adjustment within sectors. Otherwise the feature may become a disguised industry exclusion.

What would a backtest establish?

Run the thesis in pairs. First use reported net debt. Then add operating lease liabilities without changing anything else. Compare which names move, whether the result is concentrated in tenant-heavy industries, and whether the adjusted version improves outcomes across different periods.

Watch the historical coverage. Older filings may present operating lease commitments mainly in footnotes, without the balance-sheet fields used today. A backtest that treats missing older liabilities as zero creates a false improvement in the past. Require the fields, document the effective sample, and use point-in-time filings. Any return result remains hypothetical and excludes costs; a sound backtest still has limits.

Then inspect the exceptions. A company can carry substantial leases because its locations produce strong cash returns. Another can show modest recorded liabilities while signing costly new contracts after the reporting date. The ratio can't tell those stories by itself.

That is why the lease feature belongs beside the original rules. Quantery's value here isn't a verdict on how much rent is safe. It's the ability to expose the definition, change it, and see whether the change survives testing. Keep the reported view. Add the adjusted view. Make the difference earn its place.

Want to try this on your own rules? Quantery is free for 14 days: the full app, no card required.

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