Definition:

The Current Portion of Leases refers to the portion of lease obligations that are due to be paid within the next 12 months. This is a liability on the balance sheet, representing the short-term lease payments that a company is obligated to make.

Examples

1. A retail company with a store lease agreement has $120,000 in total lease payments due over the next year. The current portion of leases would be $120,000.
2. A manufacturing firm has equipment leases with $50,000 due in the next year. This amount would be recorded as the current portion of leases.

Formula:

Current Portion of Leases = Total Lease Payments Due in Next 12 Months

How to use the metric:

The current portion of leases is used by financial analysts and investors to assess a company's short-term financial obligations and liquidity. It helps determine how much cash flow is required to meet lease obligations in the near term, impacting working capital management and financial planning.

Limitations:

1. It does not provide information on the total lease liability, only the short-term portion.
2. It may not reflect the company's ability to renegotiate or refinance lease terms.
3. Changes in accounting standards can affect how leases are reported, impacting comparability.

Applies to:

Industries with significant lease obligations, such as retail, transportation, and manufacturing, where leasing assets like real estate, vehicles, or equipment is common.

Doesn't apply to:

Industries with minimal leasing activities, such as software or digital services, where assets are often intangible and not typically leased.

Summary:

The Current Portion of Leases is a financial metric indicating the short-term lease obligations a company must meet within the next year. It is crucial for assessing liquidity and short-term financial health, particularly in industries with substantial leasing activities. However, it has limitations in providing a complete picture of a company's lease liabilities and may be affected by changes in accounting standards.