Invested capital equals the sum of all cash that has been invested in a company over its life without regard to financing form or accounting name. It is the total of investments in the business from which operating revenue is derived. It can be calculated two mathematically equivalent ways as shown in Figure 1.
Invested capital is the denominator in our ROIC calculation, the primary driver of economic earnings.
Figure 1: Formulae for Invested Capital
* NIBCLs – stands for Non-Interest-Bearing Current Liabilities
* * Includes leased assets
Source: New Constructs, LLC
Below are the primary accounting distortions in reported financial statements that require economic translation and adjustment for the Invested Capital calculation.
- Add back off-balance sheet reserves
- Add back off-balance sheet debt due to operating leases
- Remove discontinued operations
- Remove accumulated Other Comprehensive Income
- Add back asset write-downs
- Remove deferred compensation assets and liabilities
- Remove deferred tax assets and liabilities
- Remove under or over funded pensions
- Remove excess cash
- Prior to 2002: Add back unrecorded and accumulated goodwill
- Adjust for midyear acquisitions
- Remove non-operating unconsolidated subsidiaries
Average Invested Capital is the average of beginning and ending invested capital. If the company discloses the purchase price and closing date of an acquisition, we weight the acquired invested capital by the percent of the fiscal year the acquisition was held.
Invested Capital Turns = Total Operating Revenue/Invested Capital
Here are details on the numerous footnotes adjustments to NOPAT to ensure the best ROIC in the business.
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