Invested capital

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.[1] The operating approach is calculated as:

Invested capital = operating net working capital + net property, plant & equipment + 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.

Approach

Operating approach

Current operating assets2,000
(Non-interest bearing current liabilities) (800 )
Net working capital 1,200  
  
Net property, plant, and equipment4,800
PV of non-capitalized lease obligations400
Goodwill and intangibles 1,600  
Invested capital 8,000  

Financing approach

Short term debt300
Current portion500
Long term debt2,300
PV of non-capitalized lease obligations 400  
Total debt and leases 3,500  
  
Common stock600
Additional paid-in capital1,900
Retained earnings1,500
Bad debt reserve200
LIFO reserve500
Capitalized R&D expense1,000
Capitalized marketing expense 300  
Total equity and equity equivalents 6,000  
     
(Marketable securities) (1,500 )
  
Invested capital 8,000  

References

  1. ↑ https://www.newconstructs.com/education-invested-capital/
  • Brealey, Myers, and Allen. Principles of Corporate Finance, 8th edition (McGraw-Hill/Irwin, 2005).
  • G. Bennett Stewart III. The Quest for Value (HarperCollins, 1991).
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