How to Calculate Invested Capital (Formula & Examples)

Invested capital is the total money that shareholders and debtholders have provided to a company to fund its assets and operations. It is used to assess how effectively a company uses its capital to generate profits and is a component in calculating Return on Invested Capital (ROIC). A clear view of invested capital allows for a direct comparison of operational performance between companies, regardless of how they are capitalized, by revealing the funding tied to core business activities.

Required Financial Statement Data

To calculate invested capital, you must gather specific data from a company’s balance sheet, which provides a snapshot of what a company owns (assets) and owes (liabilities), along with the owners’ stake (equity). The following line items are needed for the calculations.

• Current Operating Assets: Includes accounts receivable (money owed by customers for goods or services delivered) and inventory (raw materials and finished goods).
• Current Operating Liabilities: Includes accounts payable (money owed to suppliers) and accrued expenses (costs incurred but not yet paid, like salaries).
• Property, Plant, & Equipment (PP&E): The book value of long-term physical assets like buildings and machinery, net of depreciation.
• Goodwill and Intangible Assets: Non-physical, long-term operating assets that may be on the balance sheet.
• Non-Operating Cash: Excess cash not required for immediate operational needs, which may be detailed in financial statement footnotes.
• Total Debt: The sum of both short-term and long-term debt obligations.
• Shareholders’ Equity: The net worth of the company, representing the ownership interest of its shareholders.

The Operating Approach Calculation

The operating approach calculates invested capital by focusing on the net assets a company uses for its core business. The formula for this approach is: Invested Capital = (Current Operating Assets – Current Operating Liabilities) + Property, Plant, & Equipment + Goodwill and Intangible Assets.

The first part of this formula is commonly known as Net Working Capital, which represents the short-term capital locked up in daily operations. To this result, you add the value of the company’s long-term operating assets like PP&E and any intangible assets to find the total.

The Financing Approach Calculation

An alternative method is the financing approach, which looks at the sources of funding rather than the uses. This perspective calculates the total capital provided to the company by its investors, including both debtholders and equity holders.

The formula is: Invested Capital = Total Debt + Shareholders’ Equity – Non-Operating Cash & Investments.

The result from the financing approach should be identical to the result from the operating approach. This is due to the structure of the balance sheet and serves as a valuable method to verify the accuracy of the calculation.

A Practical Calculation Example

Consider a company with a simplified balance sheet. For this example, assume that of the $100 in cash, $30 is required for daily operations (operating cash) and the remaining $70 is non-operating cash.

| Assets | | Liabilities & Equity | |
| :— | :— | :— | :— |
| Cash | $100 | Accounts Payable | $150 |
| Accounts Receivable | $200 | Accrued Expenses | $50 |
| Inventory | $250 | Short-Term Debt | $100 |
| Property, Plant, & Equipment | $1,000 | Long-Term Debt | $400 |
| Total Assets | $1,550 | Shareholders’ Equity | $850 |
| | | Total Liabilities & Equity | $1,550 |

First, using the operating approach, Current Operating Assets are the sum of operating cash ($30), accounts receivable ($200), and inventory ($250), which totals $480. Current Operating Liabilities include accounts payable ($150) and accrued expenses ($50), totaling $200. The calculation is as follows: ($480 – $200) + $1,000, which results in an invested capital of $1,280.

Next, applying the financing approach, Total Debt is the sum of short-term debt ($100) and long-term debt ($400), which equals $500. Using the formula, we add Total Debt ($500) to Shareholders’ Equity ($850) and subtract the Non-Operating Cash ($70). This calculation, $500 + $850 – $70, also results in an invested capital of $1,280.