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Analysis of Operating Leases

Difficulty: Advanced

An operating lease is treated like a rental contract. Neither the leased asset nor the associated liability is reported on the lessee statement of financial position, but the rights may be very similar to the rights of an owner. The lessee only records the lease payments as a rental expense in income statement.


Present Value of Future Operating Lease Payments

Emerson Electric Co., future operating lease payments

 
Sep 30, 2017 Sep 30, 2016 Sep 30, 2015 Sep 30, 2014 Sep 30, 2013 Sep 30, 2012
Total undiscounted future operating lease payments1 (USD $ in millions)
Discount rate2 % % % % % %
Total present value of future operating lease payments (USD $ in millions)

1 Source: Emerson Electric Co. Annual Reports

2 Weighted-average interest rate for Emerson Electric Co.'s debt

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at %
2018 2018
2019 2019
2020 2020
2021 2021
2022 2022
2023 and thereafter 2023
2024
2025
Total:

1 Source: Emerson Electric Co. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at %
2017 2017
2018 2018
2019 2019
2020 2020
2021 2021
2022 and thereafter 2022
2023
2024
Total:

1 Source: Emerson Electric Co. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at %
2016 2016
2017 2017
2018 2018
2019 2019
2020 2020
2021 and thereafter 2021
2022
2023
Total:

1 Source: Emerson Electric Co. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at %
2015 2015
2016 2016
2017 2017
2018 2018
2019 2019
2020 and thereafter 2020
2021
2022
2023
Total:

1 Source: Emerson Electric Co. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at %
2014 2014
2015 2015
2016 2016
2017 2017
2018 2018
2019 and thereafter 2019
2020
2021
2022
Total:

1 Source: Emerson Electric Co. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at %
2013 2013
2014 2014
2015 2015
2016 2016
2017 2017
2018 and thereafter 2018
2019
2020
2021
Total:

1 Source: Emerson Electric Co. Annual Reports

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Analyst Adjustments for Operating Leases

Emerson Electric Co., adjustments to financial data

USD $ in millions

 
Sep 30, 2017 Sep 30, 2016 Sep 30, 2015 Sep 30, 2014 Sep 30, 2013 Sep 30, 2012
Adjustment to Total Assets
Total assets (as reported)
Add: Operating leased assets1
Total assets (adjusted)
Adjustment to Total Debt
Total debt (as reported)
Add: Operating lease obligations2
Total debt (adjusted)
Adjustment to Earnings before Interest and Tax (EBIT)
EBIT3 (as reported)
Add-back: Rent expense4
Less: Depreciation expense, operating leased assets5
EBIT (adjusted)
Adjustment to Interest Expense
Interest expense (as reported)
Add: Interest expense, operating lease obligations6
Interest expense (adjusted)

1, 2 Equal to total present value of future operating lease payments. See Details »

3 See Details »

4 Source: Emerson Electric Co. Annual Reports

5 See Details »

6 See Details »

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Adjusted Ratios for Operating Leases (Summary)

Emerson Electric Co., adjusted ratios

 
Sep 30, 2017 Sep 30, 2016 Sep 30, 2015 Sep 30, 2014 Sep 30, 2013 Sep 30, 2012
Total Asset Turnover1
Reported total asset turnover
Adjusted total asset turnover
Debt to Equity2
Reported debt to equity
Adjusted debt to equity
Return on Assets3 (ROA)
Reported ROA % % % % % %
Adjusted ROA % % % % % %
Interest Coverage4
Reported interest coverage
Adjusted interest coverage
Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Emerson Electric Co.'s adjusted total asset turnover deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017.
Adjusted debt-to-equity A solvency ratio calculated as adjusted total debt divided by total shareholders' equity. Emerson Electric Co.'s adjusted debt-to-equity deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. Emerson Electric Co.'s adjusted ROA deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017.
Adjusted interest coverage A solvency ratio calculated as adjusted EBIT divided by adjusted interest payments. Emerson Electric Co.'s adjusted interest coverage deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017.

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Adjusted Total Asset Turnover

 
Sep 30, 2017 Sep 30, 2016 Sep 30, 2015 Sep 30, 2014 Sep 30, 2013 Sep 30, 2012
As Reported
Net sales (USD $ in millions)
Total assets (USD $ in millions)
Total asset turnover1
Adjusted for Operating Leases
Net sales (USD $ in millions)
Adjusted total assets (USD $ in millions)
Adjusted total asset turnover2

2017 Calculations

1 Total asset turnover = Net sales ÷ Total assets
= ÷ =

2 Adjusted total asset turnover = Net sales ÷ Adjusted total assets
= ÷ =

Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Emerson Electric Co.'s adjusted total asset turnover deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017.

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Adjusted Debt to Equity

 
Sep 30, 2017 Sep 30, 2016 Sep 30, 2015 Sep 30, 2014 Sep 30, 2013 Sep 30, 2012
As Reported
Total debt (USD $ in millions)
Common stockholders' equity (USD $ in millions)
Debt to equity1
Adjusted for Operating Leases
Adjusted total debt (USD $ in millions)
Common stockholders' equity (USD $ in millions)
Adjusted debt to equity2

2017 Calculations

1 Debt to equity = Total debt ÷ Common stockholders' equity
= ÷ =

2 Adjusted debt to equity = Adjusted total debt ÷ Common stockholders' equity
= ÷ =

Ratio Description The company
Adjusted debt-to-equity A solvency ratio calculated as adjusted total debt divided by total shareholders' equity. Emerson Electric Co.'s adjusted debt-to-equity deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.

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Adjusted Return on Assets (ROA)

 
Sep 30, 2017 Sep 30, 2016 Sep 30, 2015 Sep 30, 2014 Sep 30, 2013 Sep 30, 2012
As Reported
Net earnings common stockholders (USD $ in millions)
Total assets (USD $ in millions)
ROA1 % % % % % %
Adjusted for Operating Leases
Net earnings common stockholders (USD $ in millions)
Adjusted total assets (USD $ in millions)
Adjusted ROA2 % % % % % %

2017 Calculations

1 ROA = 100 × Net earnings common stockholders ÷ Total assets
= 100 × ÷ = %

2 Adjusted ROA = 100 × Net earnings common stockholders ÷ Adjusted total assets
= 100 × ÷ = %

Ratio Description The company
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. Emerson Electric Co.'s adjusted ROA deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017.

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Adjusted Interest Coverage

 
Sep 30, 2017 Sep 30, 2016 Sep 30, 2015 Sep 30, 2014 Sep 30, 2013 Sep 30, 2012
As Reported
Earnings before interest and tax1 (EBIT) (USD $ in millions)
Interest expense (USD $ in millions)
Interest coverage2
Adjusted for Operating Leases
Adjusted EBIT (USD $ in millions)
Adjusted interest expense (USD $ in millions)
Adjusted interest coverage3

1 See Details »

2017 Calculations

2 Interest coverage = EBIT ÷ Interest expense
= ÷ =

3 Adjusted interest coverage = Adjusted EBIT ÷ Adjusted interest expense
= ÷ =

Ratio Description The company
Adjusted interest coverage ratio A solvency ratio calculated as adjusted EBIT divided by adjusted interest payments. Emerson Electric Co.'s adjusted interest coverage ratio deteriorated from 2015 to 2016 but then slightly improved from 2016 to 2017.

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Estimation of Depreciation Expense, Operating Leased Assets

USD $ in millions

 
Sep 30, 2017 Sep 30, 2016 Sep 30, 2015 Sep 30, 2014 Sep 30, 2013 Sep 30, 2012
Rent expense1
Less: Estimated interest expense, operating lease obligations2
Estimated depreciation expense, operating leased assets

1 Source: Emerson Electric Co., Annual Reports

2 See Details »

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Estimation of Interest Expense, Operating Lease Obligations

 
Sep 30, 2017 Sep 30, 2016 Sep 30, 2015 Sep 30, 2014 Sep 30, 2013 Sep 30, 2012
Operating leased assets, at beginning of year1 (USD $ in millions)
Discount rate2 % % % % % %
Estimated interest expense, operating lease obligations3 (USD $ in millions)

1 See Details »

2 Weighted-average interest rate for Emerson Electric Co.'s debt

2017 Calculations

3 Estimated interest expense, operating lease obligations = Operating leased assets, at beginning of year × Discount rate
= × =

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Present Value of Operating Lease Payments, at Beginning of Year

 
Sep 30, 2017 Sep 30, 2016 Sep 30, 2015 Sep 30, 2014 Sep 30, 2013 Sep 30, 2012
Total present value of future operating lease payments1 (USD $ in millions)
Rent expense2 (USD $ in millions)
Discount rate3 % % % % % %
Total present value of operating lease payments, at beginning of year4 (USD $ in millions)

1 Equal to total present value of future operating lease payments. See Details »

2 Source: Emerson Electric Co., Annual Reports

3 Weighted-average interest rate for Emerson Electric Co.'s debt

2017 Calculations

4 Total present value of operating lease payments, at beginning of year = (Total present value of future operating lease payments + Rent expense) ÷ (1 + Discount rate)
= ( + ) ÷ (1 + %) =

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