What is the Invested Capital Formula?
Invested Capital can be defined as the total money that is raised by a firm by issuing debt to bondholders and securities to equity shareholders, where the capital lease obligations and total debt would be summed to the amount of equity that is issued to the investors. The formula for Invested Capital (IC) is represented as follows,
Steps to Calculate Invested Capital
To calculate the Invested Capital follow the below steps.
- Calculate the total debt, which includes all interest-bearing debt, whether long term debtLong Term DebtLong-term debt is the debt taken by the company that gets due or is payable after one year on the date of the balance sheet. It is recorded on the liabilities side of the company's balance sheet as the non-current liability. or short term debtShort Term DebtShort term loans are the loans with a repayment period of 12 months or less, generally offered by firms, individuals or entrepreneurs for immediate liquidity requirements. These are usually provided at a higher interest rate, these short term loans often have a weekly repayment schedule..
- Calculate the total of equity and equity equivalent, which were issued to equity shareholdersEquity ShareholdersShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders' Equity Statement on the balance sheet details the change in the value of shareholder's equity from the beginning to the end of an accounting period., and these shall also include reserves.
- Finally, calculate non-operating cash and investment.
- Now take a total of step1, step2, and step3, which shall be invested capital.
Calculation Examples of Invested Capital
Let’s see some simple to advanced examples to understand it better.
Company M has given you the following details. You are required to calculate the Invested capital of the firm.
Use below given data for the calculation of economic profitEconomic ProfitEconomic profit refers to the income acquired after deducting the opportunity and explicit costs from the business revenue (i.e., total income minus overall expenses). It is an internal analysis metric used by the organizations along with the accounting profits..
- Long Term Debt: 235000.00
- Short Term Debt: 156700.00
- Equity Issued: 100900.00
- Capital Leases: 47899.00
Calculation of Invested Capital can be done using below formula as,
IC = Total Debt + Total Equity & equivalent equity investments + Non-operating Cash
=(Long term debt + short term debt + capital leaseCapital LeaseA capital lease is a legal agreement of any business equipment or property equivalent or sale of an asset by one party (lesser) to another (lessee). The lesser agrees to transfer the ownership rights to the lessee once the lease period is completed, and it is generally non-cancellable and long-term in nature.) + Equity
- =( 235,000 + 156,700 + 47,899) + 100,900
Invested Capital will be –
- Invested Capital= 540,499
Hence, the invested capital of the firm is 540,499.
Barclays & Barclays, a profit-making and cash-generating firm, has just published its annual reportAnnual ReportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements., and below is the summary of its financial position as of the end of the financial year.
Apart from the above, the company has also reported capital leases commitment off-balance sheetOff-balance SheetOff-balance sheet items are those assets that are not directly owned by the business and therefore do not appear in the basic format of the balance sheet. However, they tend to impact the financials of the company indirectly., and PV of the same is 3,55,89,970.
The management is looking for raising the return on capital ratio by repaying the debt, which shall boost the morale of its shareholders. CFO of the company has asked its junior to submit in excel file the number of funds that are invested by the firm.
You are required to calculate the invested capital of the firm.
The CFO of the firm wants to calculate the invested capital.
First, we need to calculate the total debt and total equity.
Total Debt Calculation
- Total Debt =956250000
Total Equity Calculation
- Total Equity =573500000
Calculation of Invested Capital can be done as follows,
= 95,62,50,000 + 57,35,00,000 + 3,55,89,970
Total Invested Capital will be –
- Invested Capital = 1,56,53,39,970
Therefore, the invested capital will be 95,62,50,000 + 57,35,00,000 + 3,55,89,970 which shall equal to 1,56,53,39,970
We have also included capital lease commitment as part of invested capital.
Wyatt Inc. has given you the following details about its investment done by raising equity and debt. It was noticed that the firm had not provided the equity and debt mix, but however, it has provided an application of the same. Based on the below information, you are required to calculate the total invested capital made by Wyatt Inc.
- Current Assets: 33890193.00
- Current Liabilities: 32534585.28
- Intangibles: 169450965.00
- Plant and Machinery: 211813706.25
- Buildings: 232995076.88
- Cash from Non-Operating Assets: 78371071.31
To solve this example, we will use the operating formula for calculating invested capital.
Below are the steps to calculate Invested Capital using Operating Approach
- Compute the Net-working capital, which shall be the difference of current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc. and deducting non-interest-bearing current liabilities
- The second would be to take a total of tangible assetsTangible AssetsAny physical assets owned by a firm that can be quantified with reasonable ease and are used to carry out its business activities are defined as tangible assets. For example, a company's land, as well as any structures erected on it, furniture, machinery, and equipment. – plant, equipment, and machinery.
- Last would be to take a total of intangible assetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. , which shall include patent, goodwill.Goodwill.In accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase price.
- The final step would be a total of step 1, step 2, and step 3.
We are not given the bifurcation of equity and debt directly, but we can state that the firm has invested those funds. Hence we shall use the total of those applications as the total invested capital.
Calculation of Working Capital
- Working Capital = 1355607.72
Calculation of Tangible & Intangibles
- Total Tangible & Intangibles = 614259748.13
Calculation of Invested Capital can be done as follows,
Total Invested Capital will be –
- Total Invested Capital = 693986427.16
One can notice that the firm has invested heavily in fixed assetsFixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples. and rest in working capital, and remaining is coming from non-operating assets.
Therefore, the total invested capital is 69,39,86,427.16.
Relevance and Uses
For a firm, invested capitalInvested CapitalInvested Capital is the total money that a firm raises by issuing debt to bond holders and securities to equity shareholders. Invested Capital Formula = Total Debt (Including Capital lease) + Total Equity & Equivalent Equity Investments + Non-Operating Cash shall be a source of fund which shall allow them to capitalize on new opportunities like taking over another firm or doing an expansion. This shall have 2 functions within a firm, 1st – it will use either to purchase tangible assets like building, land, or equipment. 2nd – it can use the same to cover its routine daily operating expenses like paying for employee salary or paying for inventory.
A company can choose this funding source instead of borrowing out a loan from financial institutions for its needs. Further, this can also be used to calculate ROIC, which is Return on invested capitalROIC, Which Is Return On Invested CapitalReturn on Invested Capital (ROIC) is a profitability ratio that shows how a company uses its invested capital, such as equity and debt, to generate profit. The reason this ratio is so crucial for investors before making an investment is that it helps them decide which firm to invest in., and when this ratio increases, it depicts that firm is a value creator.
This article has been a guide to Invested Capital Formula. Here we discuss the calculation of invested capital along with practical examples and a downloadable excel template. You can learn more about financing from the following articles –