Many companies use long-term leases to finance long-term assets. Although these leases are similar to mortgage payments,

Question:

Many companies use long-term leases to finance long-term assets. Although these leases are similar to mortgage payments, they are structured in such a way that they qualify as operating leases. As a result, the lease commitments do not appear on the companies' balance sheets. In a recent year, Continental Airlines had lease commitments of $324 million, and Heinz had lease commitments of $220 million.12
What effect do these types of leases have on the balance sheet? Why would the use of these long-term leases make a company's debt to equity ratio, interest coverage ratio, and look better than they really are? What is a capital lease? How does the application of capital lease accounting provide insight into a company's financial health?
Free Cash Flow
Free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the...