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Invested Capital represents the total cash investment that shareholders and debtholders have made in a company. There are two different but completely equivalent methods for calculating invested capital. The operating approach is calculated as:
Invested capital = Operating Net Working Capital + Net PP&E + Capitalized Operating Leases + Other Operating Assets + Operating Intangibles – Other Operating Liabilities – Cumulative Adjustment for Amortization of R&D
Equivalently, the financing approach is calculated as:
| Invested capital = | Total Debt and Leases |
| + | Total Equity and Equity Equivalents |
| – | Non-Operating Cash and Investments |
In symbols:
Invested capital is used in several important measurements of financial performance, including return on invested capital, economic value added, and free cash flow.
Contents |
Numerical Example
Operating approach
| Current Operating Assets | 2,000 | |
| (Non-Interest Bearing Current Liabilities) | (800 | ) |
| Net Working Capital | 1,200 | |
| Net Property, Plant, and Equipment | 4,800 | |
| PV of Non-Capitalized Lease Obligations | 400 | |
| Goodwill and Intangibles | 1,600 | |
| Invested Capital | 8,000 |
Financing approach
| Short Term Debt | 300 | |
| Current Portion | 500 | |
| Long Term Debt | 2,300 | |
| PV of Non-Capitalized Lease Obligations | 400 | |
| Total Debt and Leases | 3,500 | |
| Common Stock | 600 | |
| Additional Paid-In Capital | 1,900 | |
| Retained Earnings | 1,500 | |
| Bad Debt Reserve | 200 | |
| LIFO Reserve | 500 | |
| Capitalized R&D Expense | 1,000 | |
| Capitalized Marketing Expense | 300 | |
| Total Equity and Equity Equivalents | 6,000 | |
| Total Capital | 9,500 | |
| (Marketable Securities) | (1,500 | ) |
| Invested Capital | 8,000 |
References
- Brealey, Myers, and Allen. Principles of Corporate Finance, 8th edition (McGraw-Hill/Irwin, 2005).
- G. Bennett Stewart III. The Quest for Value (HarperCollins, 1991).
Article keywords: return on invested capital,