Invested Capital Definition and Formula

Invested capital is the amount of capital that's gone into the business over its life without regard to financing form or accounting name. The point is it's all the capital, whether it's debt, equity, preferred, pensions, etc. It's everything that the business has needed to generate its cash flows. It's the denominator in the return on invested capital calculation. It can be calculated 2 ways, financing Or operating. The financing approach is basically adding up the debt, short and long-term, including off-balance sheet, plus equity, equity equivalents, long-term liabilities. You can look at it otherwise from the operating approach as net working capital plus all fixed assets. It's important to also note that there are a great deal of adjustments that go into calculating a correct invested capital. It's also important to understand that when you're measuring return on invested capital, you look at the average capital because the net operating profit or the numerator in the return on invested capital calculation is based on the overall total year. So the average invested capital is important. It's also very important to adjust for or to look at average invested capital when it comes to mid-year acquisitions because when it comes to acquisitions, the price of that acquisition, the entire price of the acquisition, goes on the balance sheet in that year, whereas only the portion of the year that the acquisition had been closed gets included in net income. For example, if an acquisition closes on December 1st of a company's fiscal year that ends on December 31st, then the full price of the acquisition will show up on the balance sheet as of December 31st, But only 1 month's worth of revenue and income will show up on the income statement. So you got a disconnect there. We make an adjustment for that along with these many other things. This video is meant to go in tandem with our number— top-ranked definition for invested capital. So if you were to type invested capital formula into Google, you're going to get the same page I was just showing you as well. So I think what we're doing here makes a lot of sense and we're doing a really good job. Especially when it comes to all of these adjustments— discontinued operation, other comprehensive income, write-downs. If you want to get more information about the adjustments we make, go to the education section of our site and see accounting loopholes, and you'll see the income statement, balance sheet, and valuation or discounted cash flow model adjustments that we make. We've got white papers on all this stuff so you can see exactly what we're doing. We're here to be transparent. We don't want— we don't need to hide behind magical formulas or black boxes or complex definitions because we know that the work that we do is about going through the filings, reading the filings. It's about the quantity of work we do and the quality of work we do, not some fancy formula, not some consultant's black box. If you want to get a sense of why more people don't do this kind of work, read some of our closing BluePoles articles and our articles on value investing and understand why return on invested capital is such an important paradigm for linking to valuation. Now, to get some— to do some specific application, you know, here's our portfolio tool. You can have all kinds of different portfolios. You can track companies. If you want to see details on a company, you want to see invested capital, all you do is click on the details item or icon. You hit company model. And you get the actual model. If you want to go through and see the financials and metrics or the historicals, you click there. You can see the invested capital page here. And you'll see our invested capital calculation going back to 1998. You can see these green dots next to all the adjustments we like to make, right? That green dot means you can change the adjustment, right? We even have a plug override for both the fixed assets and working capital side. So you can change either one of those just categorically. If you wanted to see where we get data for certain adjustments, click on the header and we can take you straight through to the operating leases section. Here's all the pensions. Here's the operating leases. Jump you through straight to page 74. That saves you some time, right? And then here are the leases under long-term operating leases for office space, plant equipment, future minimum commitments. Under non-cancelable leases as of March 31st, 2015. There you go. So perfect transparency, not just for a few companies, but for 3,000 companies, including financials. Everything's on an apples-to-apples basis for new constructs. So let's see, if we were to, to look up a financial company, we get a model on that as well. We'll have different terminology for financial companies because there are different accounting names for the underlying cash flow activities of a financial company. But at the end of the day, you know, it still comes back to how much cash flow does the business generate, which is what we call NOPAT, relative to how much capital has gone into the business, which is what we call invested capital, right? That's, that's kind of the immutable principle of looking at all, all businesses. All businesses have a certain amount of cash flow relative to a certain amount of capital put in the business. So for a financial company, you're not really talking about net working capital, you're talking about net investment assets, right? So current assets are really your investment assets and NIPACs are your investment liabilities, right? So your net working capital is really more about net investment assets. And then you've got typically what's not a lot for, for a Financial companies' fixed assets. Now for Citigroup, you've got quite a bit because you've got a lot of goodwill from acquisitions that have been made, other fixed, you know, we can probably get some detail on that too if we click through to the original filing. And we've got a bunch of write-downs in the past too, $14.4 billion in write-downs. If we go to the balance sheet, you know, other fixed, Brokerage receivables. Could be any number of things. But typically, we will clump those things up into one line item so that our balance sheet model for our templates here doesn't show a huge number of things you don't necessarily want to see. If you want to see hidden charges and gains, right, here we take you to— Page 278, where we found the estimated change in fair value of these liabilities due to such changes in the company's own credit risk or instrument-specific credit risk was a gain of $218 million, right? What's important about that? That's non-operating, right? That's got to be pulled out of the earnings of the company because right now it's buried into it. The key is the diligence to do this right is not just embedded in our models, it's transparent to you, our clients. We do this for every single model, and we do this for lots of companies, 3,000+ companies, in fact. So, for example, if you wanted to look up invested capital for an entire sector, you just select it from our dynamic data screener, go by sector, go by— let's go by the S&P 500, you know, and let's also do the The Russell 3000, let's add that, right? So all in, that's 2,400 companies. A lot of companies fall out of the S&P 500 over time. The point is, a lot of companies in a matter of seconds, you're getting invested capital for all of them. You can download this to a CSV or Excel file. Okay. And you will get invested capital in millions for all the companies we have under coverage. And if you go back to this page, to the screener, you'll see that you can get invested capital. If you wanted to copy this and you wanted to get it over more history, you can get current trailing 12 months. You can get last fiscal year. Going back all the way to 5 years into the past. So all that data is there for you. Super high-quality calculations. One of the top-ranked calculations for invested capital by Google. On the internet. There it is, um, for new constructs. Thank you for joining this video, and please feel free to contact us if you'd like to have more information.