Implied rent multiple

Divide the balance sheet lease liability by the annual rent, or by the annual cash lease payment where rent is not separately disclosed, and you get the number of years of rent the liability represents. Nobody chooses it. It falls out of the remaining lease term and the discount rate used to bring the payments back to present value, so a long leasehold estate discounted at a modest rate produces a high figure and a short, flexible estate produces a low one.

It matters because capitalising leases moves both halves of a multiple. EBITDA rises by the rent that has left operating costs, and enterprise value rises by the liability that has joined net debt. Whether the multiple ends up higher or lower depends on which side moved proportionally more, and the implied rent multiple is the number that settles it.

The comparison is direct: capitalisation raises the multiple where the implied rent multiple exceeds the pre capitalisation EV/EBITDA, lowers it where the implied rent multiple is the smaller of the two, and leaves the multiple unchanged where they are equal. That is why two retailers paying the same rent on the same trading can move in opposite directions when their leases are brought onto the balance sheet.

Before IFRS 16 the same job was done by hand from the footnotes, usually by applying a fixed multiple to rent with eight times the figure quoted most often. It was a convention rather than a calculation, desks disagreed about the right number, and moving the arithmetic onto the balance sheet where term and rate do the work is precisely what the standard was for.