DEFINITION of Lease Utilization

Lease utilization is a financial ratio that measures how much a company uses leasing arrangements to acquire its fixed assets. Utilization ratios come in two types, which correspond with operating leases and capital leases. These are called operating lease utilization and capital lease utilization, respectively. It is important to know how a company utilizes leases, as lease utilization can affect other financial statement figures.

BREAKING DOWN Lease Utilization

Looking at the lease utilization is a good way to identify whether differences in the financial metrics of comparable firms may be due in part to differences in the way that assets are acquired. A capital lease affects the financial statements much in the same way that buying the asset on credit would. However, if a company makes heavy use of operating leases, then the assets are not reflected on the balance sheet. Therefore, due to the lower amount of assets, it may appear that the company is generating a higher return on assets. However, this could be merely an accounting phenomenon that occurs as a result of the alternative asset acquisition method. It is always a good idea to look at how a company is acquiring and financing its assets before comparing other financial ratios like return on assets (ROA).