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 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 1 Numerical Example 1.1 Operating approach 1.2 Financing approach 2 References

[edit] Numerical Example

[edit] 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

[edit] 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

[edit] 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).