Invested capital

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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 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 + 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.

Numerical example[edit]

Approach[edit]

Operating approach[edit]

Current operating assets2,000
(Non-interest bearing current liabilities)(800)
Net working capital1,200 
  
Net property, plant, and equipment4,800
PV of non-capitalized lease obligations400
Goodwill and intangibles1,600 
Invested capital8,000 

Financing approach[edit]

Short term debt300
Current portion500
Long term debt2,300
PV of non-capitalized lease obligations400 
Total debt and leases3,500 
  
Common stock600
Additional paid-in capital1,900
Retained earnings1,500
Bad debt reserve200
LIFO reserve500
Capitalized R&D expense1,000
Capitalized marketing expense300 
Total equity and equity equivalents6,000 
   
(Marketable securities)(1,500)
  
Invested capital8,000 

References[edit]