In its 2020 10-K, Carvana (CVNA), an online seller of used cars, disclosed that it discounts operating leases by 8.3%. This rate is significantly higher than Carvana’s used car and ecommerce company peers, which report the following discount rates in their most recent filings:

—Autonation (AN): 5.17%
—Carmax (KMX): 5.37%
—Lithia Motors (LAD): 4.69%
—Penske Automotive (PAG): 6.4%

Using an inflated discount rate hide’s a firm’s true liabilities from investors.

Carvana has $259.7 million in future operating lease obligations. The present value of those obligations, according to Carvana, is $166.9 million. If we use the blended average discount rate for Carvana’s peer group— 5.4%— we calculate a lease liability of $192.1 million. It means Carvana is understating its lease liabilities by approximately $25.2 million, or 9.7% of its future operating lease obligations and 1.1% of total liabilities.