How to Calculate the ROI for Leasing Equipment

In short, calculating the ROI of leasing is the same equation as any other ROI calculation, but you just need to be aware of the full, actual cost and need to account for the risk factors associated with leasing (charges and fees).

How to calculate ROI in general

The profit from an investment, less cost, is divided by the cost of investment which facilitated it. The formula is:

ROI = (Profit from Investment - Cost of Investment) / Cost of Investment

ROI = (P-C) / C

For example, an investment in a marketing campaign costs $1,000 and $1,500 worth of sales can be attributed directly to that marketing campaign:

Profit from Investment = $1,500

Cost of Investment = $1,000

ROI = ($1,500 - $1,000)/$1,000

ROI = $500/$1,000

ROI = 50%

($500 being 50% of $1,000)

This is obviously a very simplistic example but is used to illustrate the point. The ROI of leasing explanation (which follows) will aim to highlight the factors to consider when leasing your assets, as well as what options are available to you for reporting the information.

Why you need to calculate the ROI of leased assets

Like any aspect of your business, knowledge is power. The more you know about the fine details of your lease portfolio, the more you can make sure it is optimised to run as efficiently and profitably as possible.

Knowing the ROI of your leased equipment or other leased assets forms part of that.

Doing this can help you to identify which leases are performing well and which aren’t doing quite so well. You can then work to rectify what’s not working and make your portfolio more profitable.

How to calculate the ROI of leasing

When it comes to forming the ‘P’ and ‘C’ for your ROI formula, there’s obviously a lot more work involved than just headline numbers as were used in the above example. And for leased assets, there are particular considerations to be mindful of.

For instance, the whole cost of the agreement needs to be calculated.

This includes the total sum of the monthly/quarterly payments, an estimation of any additional charges which you know you’ll incur (such as cleaning and other maintenance fees, return courier charges), a risk assessment of penalty charges (for example, make-good repairs or any lost parts), regard for useful life of the asset, a view of end of life costs (such as disposal or return) and you may wish to include managerial or administrative costs.

The other half of the ROI equation, the gain from your leased assets, can be particularly hard to quantify. Completing this part of the equation can be subjective. The best way to look at this is, how much cash did you save in the first year that you leased your equipment compared to spending a large upfront amount to purchase it, and what did you use that cost savings on? What profit did you make from that investment?

Therefore, calculating leasing’s ROI can become a time-consuming aspect of managing your company’s lease portfolio. With one of the problems being getting access to the relevant data. However, with the advent of IFRS 16 and the centralised database this has become a lot easier.

IFRS 16 lease accounting

The IFRS 16 standard mandated that, largely, all leases needed to be reflected on a company’s balance sheet. To enable this, companies first had to gather all the required information and then make a number of assessments as to the treatments and calculations.

This meant the introduction of IFRS 16 saw companies consolidate their lease portfolio data into one central location and produce the necessary audit trails. This makes the time intensive process of reporting and conducting full investigations and analysis into the ROI of leased assets significantly shorter, especially when using IFRS 16 lease accounting software.

Lease or buy your equipment

Even now with IFRS 16 there is debate around should you lease or buy. The data is now more readily available, but the correct calculation method is still subjective.

The above calculations may suggest that a better ROI could be achieved from a capital purchase rather than a lease agreement, especially if you place too much emphasis on the risks of leasing.

However, if you shift some of that emphasis to the many benefits of leasing instead, including the more intricate factors such as cash flow savings, leasing should be more favourable.

Even when considering the implications of IFRS 16, leasing may still prove the right solution through your ROI calculation.

Still don’t know which option is best for you and your business

Being sure about the decisions you’re making for your business can be tricky. You’ll want to make sure you’ve considered all the angles and know the details of each option.

At Quadrent, we have a long history of making the complex world of leasing and IFRS 16 simpler. We work with organisations helping them access assets without sacrificing cash flow and addressing their ESG risk in the process. With a team that has in-depth leasing knowledge and specialised accounting backgrounds, we’ll help you get the most value out of your assets while addressing growing ESG requirements and reporting expectations.