Bounce rate

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.

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).