## 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,

**Invested Capital Formula = Total Debt (Including Capital lease) + Total Equity & Equivalent Equity Investments + Non-Operating Cash**

### Steps to Calculate Invested Capital

- Calculate the total debt, which includes all interest-bearing debt, whether long term debt or short term debt.
- Calculate the total of equity and equity equivalent, which were issued to equity shareholders, 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.

#### Example #1

**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 profit.

- 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 lease) + 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.

#### Example #2

**Barclays & Barclays, a profit-making and cash-generating firm, has just published its annual report, and below is the summary of its financial position as of the end of the financial year.**

4.9 (831 ratings) 117 Courses | 25+ Projects | 600+ Hours | Full Lifetime Access | Certificate of Completion

Apart from the above, the company has also reported capital leases commitment off-balance sheet, 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.

**Solution**

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**

=337500000+495000000+123750000

**Total Debt =956250000**

**Total Equity Calculation**

=450000000+65000000+58500000

**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

**Note **

We have also included capital lease commitment as part of invested capital.

#### Example #3

**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

**Solution**

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 assets and deducting non-interest-bearing current liabilities
- The second would be to take a total of tangible assets – plant, equipment, and machinery.
- Last would be to take a total of intangible assets, which shall include patent, goodwill.
- 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**

=33890193.00-32534585

**Working Capital**= 1355607.72

**Calculation of Tangible & Intangibles**

=169450965.00+211813706.25+232995076.88

**Total Tangible & Intangibles = 614259748.13**

Calculation of Invested Capital can be done as follows,

=78371071.31+614259748.13+1355607.72

**Total Invested Capital will be –**

**Total Invested Capital = 693986427.16**

One can notice that the firm has invested heavily in fixed assets 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 capital 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, 1^{st} – it will use either to purchase tangible assets like building, land, or equipment. 2^{nd} – 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 capital, and when this ratio increases, it depicts that firm is a value creator.

### Recommended Articles

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