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.
Figure 1: Formulae for Invested Capital
Below are the primary accounting distortions in reported financial statements that require economic translation and adjustment for the Invested Capital calculation.
- Capitalized Expenses
- Excess Cash
- LIFO Reserve
- Other Non-cash Reserves
- Deferred Revenue
- Deferred taxes
- Deferred Compensation
- Charges to Other Accounts
- Operating Lease
- Accumulated Goodwill Amortization
- Unrecorded Goodwill derived from acquisitions recorded under the Pooling Method of Accounting
- After-tax Portion of Asset Write-downs
- Investments in Unconsolidated Subs/Minority Interests
- Unrealized (Gains)/Losses on Investments
- Mid-year acquisitions - adjusting for the mismatch of GAAP's recording of cash flows and capital posted to the balance sheet
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