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.

Contents

Numerical example

Approach

Operating approach

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

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