Invested Capital

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 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:

: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

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
Total Capital9,500
(Marketable Securities)(1,500)
Invested Capital8,000


* 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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