What is Invested capital?
Invested capital equals to operating assets minus operating liabilities, but I dont understand the meaning of it. Can anyone show me the detailed formula to calculate it?
Thanks.
I’ll give it a shot… 1) Assets – Liabilities = Equity 2) ∴ Assets = Liabilities + Equity 3) Typically, company’s Asset’s are primarily comprised of Operating Assets. The key assumption here is we are assuming that most Assets are operating. You could also approach this from the view that retained earnings are not net-Assets per se, but more of just a track record of performance, and overstating understating net-Assets. 4) Liabilities are split more evenly between Operating Liabilities (like Payables) and Debt (long-term bonds). 5) (Assets – Operating Assets) = (Debt + Operating Liabilities) + Equity → we can ignore the non-Operating Assets → Operating Assets ≈ (Debt + Operating Liabilities) + Equity = Invested Capital 6) ∴ (Op Assets – Op Liabilities) = Net Operating Assets = (Debt + Equity) = Invested Capital This is how you could use an operating section of a balance sheet to make a statement about prior investments in a company. Again, some major assumptions going on here. There’re lots of adjustments you could make—a pretty common one is adding back PP&E to Op Assets. Something the curriculum doesn’t give as much attention to as I’d expect is ROIC, which is roughly: NOPLAT / Net Operating Assets. You can compare this directly with WACC—If ROIC > WACC, a company “creates value.” (This is scaled by its growth rate.) Finally, don’t confuse Invested Capital with Capital Employed, ≈ Net Operating Assets + PP&E