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.[1] 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:
Invested capital is used in several important measurements of financial performance, including return on invested capital, economic value added, and free cash flow.
Approach
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 |
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
- 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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