Many companies’ operating lease expense is material. The decision management makes between investing in capex and investing in a lease is not a decision between an expense and an investment, but rather a decision in how management wants to finance their investments. If they would rather spend cash up front for the asset, they will spend capex. However, if they want to spread the cost of the asset over several years, they will instead choose to lease the asset. That said, as-reported accounting statements treat one as an investment, and the other as an expense that does not impact the balance sheet.
When companies spend materially on operating leases, as-reported metrics like Total Assets and ROA materially overstate the company’s true profitability and capital efficiency versus UAFRS’s adjusted metrics. This can lead to investors and management believing that the company has a stronger performance than is justified, inflating valuations.