Operating Leases: Why Debt-Free Is Not Obligation-Free

A company can have almost no conventional borrowing and still face substantial contractual financial obligations. That distinction matters when investors evaluate balance-sheet strength, particularly in businesses that depend on rented stores, offices, warehouses or other physical infrastructure.

Chipotle Mexican Grill provides a useful example. At June 30, 2026, the restaurant operator reported no outstanding borrowings under its revolving credit facility. Yet its balance sheet contained approximately $5.42 billion in operating lease liabilities.

Those figures are not contradictory. Chipotle does not need to borrow money from a bank to operate its restaurants, but it still has contractual commitments to landlords for the premises it occupies.

For long-term investors, this raises an important question: how should lease obligations influence the assessment of financial health when they do not behave exactly like traditional debt?

What are operating leases?

An operating lease is an arrangement in which a business pays to use an asset without purchasing it outright. Restaurants lease locations, retailers rent stores, logistics companies lease distribution facilities, and many businesses rent office space or equipment.

These arrangements can make economic sense. Leasing reduces the need to purchase property, preserves flexibility in some circumstances and allows companies to expand without committing the full purchase price of every location upfront.

But leasing does not eliminate the cost of occupying those assets. Instead of paying to acquire a building, the company agrees to make payments over the lease term.

Those payments can represent a meaningful financial obligation, particularly when contracts extend across many years.

Under the US accounting standard ASC 842, most leases with terms exceeding twelve months give rise to both a right-of-use asset and a corresponding lease liability on the balance sheet. The Financial Accounting Standards Board introduced these requirements to improve transparency around the assets and obligations associated with leasing.

The result is that operating leases are no longer generally invisible in US corporate balance sheets. However, they can still be overlooked when investors focus exclusively on conventional borrowing.

Why Chipotle is a useful example

Chipotle operates thousands of company-owned restaurants. Those locations require physical premises, and many are occupied through long-term lease agreements.

According to its June 2026 quarterly filing, the company reported the following operating lease obligations:

• Current operating lease liabilities: approximately $317 million.
• Long-term operating lease liabilities: approximately $5.10 billion.
• Total recognized operating lease liabilities: approximately $5.42 billion.

These liabilities represent the present value of lease payments included in the accounting measurement. They are different from outstanding bank loans or bonds, but they still reflect contractual payments the company generally must make to continue using its leased assets.

At the same reporting date, Chipotle disclosed a $500 million revolving credit facility with no outstanding borrowings.

It would therefore be reasonable to describe Chipotle as having no outstanding credit-line borrowings. It would be less informative to conclude that the company has no meaningful contractual financial obligations.

The distinction becomes especially important when investors compare businesses that own their properties with businesses that lease them.

A lease liability is not identical to bank debt

Operating lease liabilities and traditional financial debt share an important characteristic: both involve obligations that generally require future cash payments.

But they are not economically identical.

A bank loan typically provides financing that the company can use to purchase assets or fund operations. The company then makes principal and interest payments according to the financing agreement.

An operating lease gives the company the right to use a particular asset over an agreed period. The associated payments compensate the owner for providing that asset.

The distinction matters because the leased asset may be essential to generating revenue. Chipotle needs physical restaurant locations to operate its company-owned stores. Rental payments are therefore part of the economic cost of running the business.

Neither arrangement is automatically better. Owning property can require substantial upfront capital, while leasing can create recurring fixed commitments. Investors need to consider the operating model rather than assuming that borrowing is inherently undesirable and leasing is financially harmless.

Why lease liabilities appear alongside lease assets

Under modern lease accounting, a company generally recognizes a right-of-use asset when it obtains the right to use leased property for a specified period.

That asset represents economic access to the premises or equipment. The corresponding liability represents the obligation to make qualifying future lease payments.

Chipotle's June 2026 balance sheet illustrates both sides. Alongside approximately $5.42 billion in operating lease liabilities, the company reported around $4.77 billion in operating lease assets.

These balances are not necessarily equal after initial recognition. Depreciation or amortization patterns, lease expenses, payments, incentives, impairments and other adjustments can cause their carrying values to differ.

The important point is that the asset and liability represent different sides of the same contractual arrangement.

Investors should also avoid treating the right-of-use asset as cash-like collateral that can readily extinguish the corresponding liability. The asset represents the right to occupy and use specific premises. It does not usually provide the same liquidity as cash or marketable securities.

A company can therefore report substantial assets associated with leases while still requiring future operating cash flow to meet its contractual payment obligations.

Recognized lease liabilities are not the same as total future rent

One subtle but important issue concerns the difference between the present value of lease liabilities and the undiscounted payments scheduled under those agreements.

Chipotle's 2025 annual report included a lease maturity schedule showing approximately $7.47 billion in future operating lease payments as of December 31, 2025.

After subtracting approximately $2.40 billion of imputed interest, the recognized operating lease liability was approximately $5.08 billion.

This illustrates why the two numbers serve different purposes.

The undiscounted figure describes contractual payments scheduled across future periods. The recognized liability measures the present value of the payments included in the lease accounting calculation.

Discounting matters because a payment due several years from now is not economically equivalent to a payment due immediately.

It is also important not to add the undiscounted commitments to the recognized lease liability. Doing so would count substantially the same obligations twice.

The maturity schedule and the balance-sheet liability are alternative perspectives on the same underlying payment commitments, not two independent categories of debt.

Lease commitments can increase as a business expands

Chipotle's operating lease liabilities increased from approximately $5.08 billion at the end of 2025 to $5.42 billion by June 30, 2026.

That represents an increase of roughly $343 million over six months.

A rising lease liability does not automatically indicate deteriorating financial health. For a growing restaurant chain, signing new leases can be a necessary part of opening additional locations and expanding future earning capacity.

But the increase should still be evaluated economically.

New restaurants can create value when the returns on the investment exceed the capital and operating costs required to establish them. The lease commitment is part of that economic equation, even when the company does not purchase the property.

If new restaurants generate attractive returns, additional lease obligations may be justified. If store economics weaken, the same commitments can become burdensome because rent payments do not necessarily decline alongside restaurant revenue.

Long-term investors should therefore connect lease growth with store-level profitability, unit economics and the returns generated by expansion.

Why fixed lease payments matter during a downturn

Operating leases become particularly important when business performance deteriorates.

Consider a restaurant generating $3 million in annual revenue with $250,000 in fixed annual rent. During a strong period, the rental commitment may be comfortably supported by restaurant-level earnings.

If revenue declines significantly, however, the company generally cannot reduce its contractual rent in proportion to the revenue decline.

Other costs may be more flexible. A restaurant can reduce food purchases when customer demand weakens and may be able to adjust some staffing expenses. Fixed occupancy costs are often harder to change quickly.

This creates operating leverage in both directions. When revenue rises, fixed costs can be spread over a larger revenue base. When revenue falls, those same costs consume a greater percentage of sales.

The contractual rigidity matters even for financially successful companies. A business may have little conventional debt and still operate with meaningful fixed financial commitments.

This is why financial-health analysis should consider the resilience of operating cash flows relative to all important contractual obligations, not just bank borrowing.

How leases affect free cash flow

Lease payments also influence cash-flow analysis, although their treatment requires care.

Under US GAAP, cash payments for operating leases are generally classified within operating cash flow. This means the conventional calculation of free cash flow, operating cash flow minus capital expenditure, already reflects operating lease cash payments.

Investors should not automatically subtract the same operating lease payments again from reported free cash flow. Doing so would double-count a cost already included in the operating cash-flow calculation.

Chipotle disclosed approximately $284.7 million of cash paid for operating lease liabilities during the first six months of 2026.

That figure helps investors understand the cash commitments associated with its property arrangements. It should be read alongside the company's broader operating cash flow and capital expenditure rather than mechanically deducted from free cash flow a second time.

The distinction becomes more complicated when comparing companies reporting under different accounting standards. Under IFRS 16, most lessee arrangements use a model that separates depreciation and interest, and the principal portion of lease payments is generally classified as financing cash flow.

As a result, reported EBITDA, operating cash flow and free-cash-flow calculations may require adjustments before companies using different accounting treatments can be compared meaningfully.

Lease-adjusted debt ratios require consistency

One practical approach is to consider lease obligations alongside conventional financial debt when evaluating leverage.

But adding lease liabilities to a debt figure is only the beginning. Investors must also ensure that the earnings or cash-flow measure used for comparison is consistent with the treatment of lease expenses.

For example, consider two otherwise similar companies. One owns its operating properties using borrowed money. The other leases its properties.

The first company may report substantial interest-bearing debt and depreciation expenses. The second may report much less conventional debt, but significant operating lease liabilities and rental expenses.

Comparing their conventional net-debt-to-EBITDA ratios without considering the differences can produce misleading conclusions about relative financial leverage.

However, including lease liabilities in the numerator while leaving the income measure unchanged can introduce a different inconsistency.

Lease-adjusted analysis should therefore follow a coherent methodology, treating the obligations and the associated expense or cash-flow measures consistently.

The same principle applies when using enterprise value. Some analytical approaches incorporate lease liabilities into enterprise value, but the earnings denominator must then be defined compatibly to avoid misleading valuation comparisons.

There is no benefit in producing a more complicated ratio if its numerator and denominator are no longer economically comparable.

What lease liabilities do not capture

Even modern lease accounting does not necessarily capture every future occupancy-related expense in one balance-sheet liability.

Variable lease payments that depend on future sales or other conditions may fall outside the recognized liability measurement. Certain short-term leases can also qualify for recognition exemptions.

Renewal options generally depend on the applicable accounting rules and whether exercising them is considered reasonably certain. Some future payments may therefore be economically plausible without being included in the current liability.

Investors should consequently read the lease footnotes rather than relying exclusively on the balance-sheet total.

The useful questions include how long the commitments extend, how much is payable in the next several years, whether rents can increase, how much flexibility exists to close underperforming locations, and whether significant additional leases have been signed but not yet commenced.

The goal is not to classify every future rent payment as conventional debt. It is to understand which payments are fixed, which are flexible and how they influence the company's ability to withstand weaker operating conditions.

What MOATEY currently sees in Chipotle

MOATEY currently classifies Chipotle as a Fast Grower and rates the company Risky, with an overall score of 46.5 out of 95.

As of October 22, 2026, Chipotle receives 46.5 of 65 available Fundamentals points and 0 of 30 Valuation points. Within Fundamentals, the Financial Health assessment contributes 3.8 of 15 available points.

Management currently receives 15 of 15 points, Growth 10.7 of 15 and Moat 17 of 20.

These observations illustrate why financial health needs to be evaluated separately from other measures of business quality. A company can perform well on several fundamental dimensions while showing considerably weaker evidence elsewhere.

Importantly, the Financial Health score should not be interpreted as a direct measure of Chipotle's lease obligations. The figures presented here do not establish how much of that assessment, if any, is attributable specifically to operating leases.

MOATEY currently identifies no major or minor risk flags for Chipotle. That does not imply the absence of contractual commitments or financial uncertainty. Individual risk flags and the wider Financial Health assessment address different questions within the framework.

Readers can explore the four pillars of MOATEY's fundamental assessment to understand how financial health fits alongside growth, management and competitive advantage. The broader systematic methodology and supporting research are documented in the MOATEY factsheet.

Five questions investors should ask about leases

A practical lease analysis begins with the size of the obligation. How large are recognized lease liabilities relative to operating cash flow, available liquidity and the company's broader financial commitments?

Next, consider the payment schedule. A business with lease payments spread across many years may face a different liquidity profile from one with a substantial concentration of near-term obligations.

Third, examine the relationship between leasing and growth. Are new commitments associated with profitable expansion, or are they accumulating while existing locations struggle to generate satisfactory returns?

Fourth, evaluate contractual flexibility. Some businesses have greater opportunities to renegotiate, sublease or exit locations than others. The accounting liability alone does not fully describe this flexibility.

Finally, compare the company's operating cash generation with the commitments it must continue meeting during weaker periods. A business can be profitable under normal conditions while becoming financially constrained when fixed payments absorb an increasing percentage of cash flow.

Together, these questions offer a more useful understanding of lease obligations than simply adding them to conventional debt and assuming the analysis is complete.

Debt-free does not mean obligation-free

Operating leases are a useful reminder that financial risk cannot be understood from a single balance-sheet number.

Chipotle had no outstanding borrowings under its credit facility at June 30, 2026, yet reported approximately $5.42 billion in operating lease liabilities. Those obligations do not make Chipotle equivalent to a heavily indebted company, but they are relevant to understanding its operating model and future cash requirements.

The distinction is especially important for businesses that rely on physical locations. Retailers, restaurants and other location-dependent companies can appear conservatively financed while carrying substantial commitments to landlords.

Investors should not automatically interpret those commitments negatively. Leasing can be an efficient way to deploy capital, particularly when the underlying locations generate strong returns.

What matters is whether the business can comfortably support those payments through different operating conditions, whether the commitments are producing attractive economic returns, and whether the valuation adequately reflects the associated risks.

A strong balance sheet is not simply one with little bank debt. It is one where the company's financial obligations remain manageable relative to its earning power, liquidity and resilience.

Understanding leases brings investors closer to that economic reality.