Corporate debt is often discussed as if it were a single, easy-to-read number. Open a company’s balance sheet, find total borrowings, compare them with earnings or equity, and the job appears done.
But leverage can be more complicated than the headline figure suggests.
A new Federal Reserve research paper examines two ways that nonfinancial companies can carry obligations that are not fully captured by a simple debt snapshot: operating leases that historically sat outside the balance sheet, and short-term borrowing taken on and repaid between reporting dates. The findings are a reminder that a company can look conservatively financed at quarter-end while relying much more heavily on fixed payments and temporary credit during the quarter.
That does not mean every lease or short-term loan is a warning sign. These are ordinary tools of business. The practical lesson is narrower and more useful: investors should judge debt by its economic substance and cash demands, not only by one balance-sheet line.
What the Federal Reserve study found
The July 2026 International Finance Discussion Paper, written by Federal Reserve economist Cody Kallen, studies hidden leverage in publicly traded nonfinancial companies.
The paper identifies two forms. The first is substantial operating leases before the 2019 accounting change that brought most leases onto corporate balance sheets. The second is “intraperiod borrowing”—short-term debt raised and repaid within a reporting period, so it may not appear in the debt balance shown on the quarter-end or year-end date.
According to the study, about 29% of publicly traded firms used substantial operating leases in the period examined, while 12% showed evidence of substantial intraperiod borrowing. Companies using hidden leverage tended to be smaller, more dependent on short-term funding and less closely followed by sophisticated market participants. They also reported lower conventional leverage.
The accounting change provides an especially revealing test. When operating leases became visible on balance sheets in 2019, the most exposed firms subsequently reduced capital expenditure by 25% and research and development spending by 14%, according to the paper. They also reduced intraperiod borrowing.
These are research estimates, not a claim that every affected company faced the same outcome. Still, the pattern suggests that better disclosure can change behaviour because lenders, boards and investors see a fuller picture of obligations.
Why a reporting-date snapshot can mislead
A balance sheet records financial position on a specific date. That is valuable, but it is not a complete diary of how a company financed itself during the previous three months.
Imagine a retailer that draws heavily on a credit line to build inventory before a holiday season, then repays the loan after sales arrive but before its fiscal year closes. Its year-end balance sheet may show little short-term borrowing even though the business depended on that facility during a critical period.
This timing effect is sometimes called window dressing when transactions are deliberately arranged to improve the appearance of reported figures. But seasonal borrowing is not automatically deceptive. Many businesses have legitimate working-capital cycles. The key question is whether the period-end figure fairly represents normal funding needs.
Investors can therefore learn more from a range of balances, cash-flow movements and disclosures than from one date alone.
Leases are debt-like even when they support growth
Leasing a store, aircraft, warehouse, vehicle or piece of equipment can be an efficient alternative to buying it. It preserves cash and may provide flexibility. Yet a long-term lease also commits the company to future payments, much like debt service.
U.S. accounting rules now generally require lessees to recognise a lease liability and a corresponding right-of-use asset for leases longer than 12 months. That reform made many obligations more visible, but it did not eliminate the need for judgement.
Lease liabilities can be presented in different balance-sheet lines. Variable payments may not be captured in the same way as fixed commitments. Renewal options depend on assumptions about whether the company is reasonably certain to exercise them. Investors should therefore read the lease footnote, not merely search for the word “debt.”
The most useful items include the current and non-current lease liabilities, annual maturity schedule, weighted-average lease term, discount rate and total lease cost. Together, these show the size and timing of the cash commitment.
Five checks for a clearer leverage picture
1. Reconcile debt with the cash-flow statement
Look at proceeds from borrowings and repayments of borrowings over the full reporting period. Large gross flows alongside a small closing debt balance may indicate substantial use of temporary funding. The pattern may be entirely reasonable, but it deserves an explanation.
2. Add lease obligations to the conversation
For lease-intensive businesses, compare conventional net debt with a broader measure that includes lease liabilities. Analysts differ on the exact adjustment, so consistency matters more than finding one “perfect” ratio. Compare the same definition across time and against genuinely similar companies.
3. Study liquidity, not just leverage
A company can carry moderate debt yet face refinancing pressure if obligations mature soon. Check cash, undrawn committed credit facilities, debt maturities, lease payments and any covenant disclosures. Near-term payment concentration can matter more than the total debt number.
4. Read the 8-K and footnotes
The U.S. Securities and Exchange Commission’s investor guidance notes that Form 8-K Item 2.03 covers material direct financial obligations and obligations arising from off-balance-sheet arrangements. Item 2.04 covers events that accelerate or increase such obligations. These filings can reveal important developments between quarterly reports.
Footnotes also explain factoring, guarantees, supplier-finance programmes, securitisations and other arrangements that may affect cash claims or risk transfer. Not all belong in net debt, but none should be ignored simply because it sits outside the main debt line.
5. Watch the trend around reporting dates
Compare several quarters rather than relying on one year-end figure. Repeated drops in debt or unusually strong cash balances at every reporting date—followed by sharp reversals—may indicate that the snapshot is unusually flattering. Earnings-call comments about seasonal working capital can help distinguish normal operations from a persistent transparency problem.
What this means for investors
Hidden leverage matters because fixed financial commitments reduce flexibility. When sales weaken, interest, rent and lease payments do not automatically fall with revenue. A company with understated normal funding needs may have less room to invest, maintain dividends or absorb an economic shock than its headline ratios imply.
The new research also highlights why disclosure quality itself can be informative. If greater visibility leads companies to reduce investment or borrowing, the earlier figures may not have reflected the constraints perceived by creditors and managers. Better information does more than help investors calculate a ratio; it can change financing decisions inside the company.
Still, the right conclusion is not to treat every off-balance-sheet arrangement as misconduct. Airlines lease aircraft, retailers lease stores, manufacturers use supplier finance and seasonal companies draw working-capital facilities for sound commercial reasons. The analytical task is to understand who ultimately owes cash, how much, and when.
The bottom line
Corporate leverage is a flow as well as a stock. The balance sheet shows what a company owed on one date; the cash-flow statement, footnotes and interim filings reveal how it financed the months around that date.
For a broad first pass, investors can ask three questions: What fixed payments are missing from the headline debt figure? How much short-term funding did the business use during the period? And would the company still have comfortable liquidity if revenue weakened or refinancing became more expensive?
Those questions will not replace detailed credit analysis. But they can prevent a deceptively tidy quarter-end balance sheet from being mistaken for the whole story.