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. 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:

K = D %2B E - M \,

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

Approach

Operating approach

Current cperating 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  
     
(Marketable securities) (1,500 )
   
Invested capital 8,000  

References