Invested Capital: Definition And Formulae

invested capital

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.

Invested capital is the denominator in our ROIC calculation, the primary driver of economic earnings.

Figure 1: Formulae for Invested Capital


* NIBCLs – stands for Non-Interest-Bearing Current Liabilities
* * Includes leased assets
Source: New Constructs, LLC

When we calculate invested capital, we make numerous adjustments to close accounting loopholes and ensure apples-to-apples comparability across thousands of companies. A company shouldn’t be able to hide from its history, for instance, through write-downs or impairments. For more details, see our Invested Capital Webinar.

Figure 2 shows the companies where adjustments make the biggest difference by showing how much reported total assets differs from our calculation of invested capital.

Figure 2: Companies With Most Understated/Overstated AssetsNewConstructs_MostOverUnderstatedAssets_2016-04-11Sources:   New Constructs, LLC and company filings.

Petroleo Brasileiro’s (PBR) invested capital is significantly higher than its reported total assets. Our invested capital calculation for PBR can be seen here. The $134 billion discrepancy stems from $88 billion in off-balance sheet operating leases, which we include in invested capital, as well as $27 billion in accumulated asset write-downs. In 2014 alone, PBR wrote down over $20 billion in assets, including a $16 billion impairment, which we identify in our model here.

Time Warner (TWX), Pfizer (PFE), Viavi Solutions (VIAV), and Exxon Mobil (XOM) are the other companies with the most understated reported total asset value. All the adjustments made to TWX’s total assets, in order to calculate invested capital, can be found here. In each company model, we also show how to convert GAAP Net Income to NOPAT.  We believe transparency always helps investors, which is why all our calculations are visible throughout each company model. See the adjustments made to XOM”s total assets here and the invested capital calculation here.

On the other hand, Mitsubishi UFJ Financial (MTU) invested capital is significantly lower than its reported total assets. See our invested capital calculation for MTU each year dating back to 2013 here.  The discrepancy comes from how we treat the investment liabilities for financial companies like Mitsubishi. We make multiple, special adjustments to our models to reflect the different accounting in different sectors and regions of the world. We focus on the economics of business, and, in the process, our models transcend the accounting loopholes and idiosyncrasies that make building good models difficult.

Our models and calculations are 100% transparent because we want our clients to know how much work we do to ensure we give them the best earnings quality and valuation models in the business.

Bank of America (BAC), Freddie Mac (FMCC) JPMorgan Chase (JPM) and HSBC Holdings (HSBC) round out the companies with the most overstated reported total assets.

Below are the primary accounting distortions in reported financial statements that require economic translation and adjustment for the Invested Capital calculation.

  1. Add back off-balance sheet reserves
  2. Add back off-balance sheet debt due to operating leases
  3. Remove discontinued operations
  4. Remove accumulated Other Comprehensive Income
  5. Add back asset write-downs
  6. Remove deferred compensation assets and liabilities
  7. Remove deferred tax assets and liabilities
  8. Remove under or over funded pensions
  9. Remove excess cash
  10. Prior to 2002: Add back unrecorded and accumulated goodwill
  11. Adjust for midyear acquisitions
  12. Remove non-operating unconsolidated subsidiaries

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

Here are details on the numerous footnotes adjustments to NOPAT to ensure the best ROIC in the business.

See our webinar on importance of ROIC and how to calculate it.

Here is our report on “ROIC: The Paradigm For Linking Corporate Performance to Valuation.

Want to apply these concepts and more?

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  • Tom McConnell

    May 15, 2013

    I saw your discussion on CNBC and went to your web site.

    The figure 1 on both the NOPAT definition and the invested capital definition will not display.

    Am I doing something wrong?

    Tom McConnell

  • Ray Mosteller

    May 15, 2013

    When David on CNBC asked you about detailing your calculations of ROIC, your answer was “it’s all transparent and detailed very clearly on my website blog [above?].

    I find this anything BUT transparent. The details of your calculation are totally worthless. Evey your general description is, in itself, very vague. Can you perhaps show your calculations to arrive at Apple’s ROIC of 340%?

  • David Trainer

    May 15, 2013

    See the model in my prior reply comment.

  • Steve Capie

    May 15, 2013

    Hi David,

    You said see the model in my prior reply comment. I didn’t see a response to Tom McConnell’s comment above. I verified that for both NOPAT and Investing images browsers cannot open

    If you can help clarify these definitions and provide an example of how you came up with your ROIC values for Apple that would be greatly appreciated. I notice that sites like Microsoft’s investing site have completely different ROIC values than yours( provides a ROIC for last year for Apple to be 28.5.

  • David Trainer

    May 15, 2013

    Steve Caple:
    Thank you for your comment.
    My ROICs tend to be different than everyone’s because my models incorporate more data, especially from the financial footnotes. New Constructs specializes in providing the cleanest and most accurate ROICs on US stock in the market.
    Some of our biggest clients are highly sophisticated quant funds that are super-snobs when it comes to data. More info on importance of footnotes is here:

    Here is definition of NOPAT:
    Here is definition of ROIC:

    Here is my response to Tim McConnell’s comment:
    The link below shows my calculations and data values behind $283 share price implied by he 70% ROIC and behind the $240 share price implied by 50% ROIC.
    The link is to a file showing my model, which I think is the most transparent way to explain my calculations.

    Once you see how my model works, you can perform your own scenarios on valuation based on whatever margins, ROIC, or revenues levels you want.

  • David Trainer

    May 15, 2013

    Here is the invested capital model for AAPL.

    I am happy to share any other pages from the model that you wish.

  • ask

    July 17, 2015

    Very good info. Lucky me I came across your site by accident (stumbleupon).

    I have saved it for later!

  • Ritu

    November 14, 2015

    Assume that a company employs 100 people and produces no revenue. Assume the investor injects 10k cash into the company for paying employee salaries. How will this be captured as part of invested capital.

    (This cash will be shown on balance sheet at t=0 but then it goes into the hands of employees and disappears from the balance sheet. So at t=1 it wont be a part of BV equity. How to find invested capital then? How does your formula/adjustment reconcile this?)

  • David Trainer

    November 16, 2015

    There is no reconciliation. In this (unique and specific) scenario, you have a highly negative NOPAT Margin and no invested capital.

  • Ritu

    November 17, 2015

    Thanks for your revert, David.

    Let me make the scenario a little more worldly.
    Say the company is in the business of selling manhours (the outsourcing vendor types). Employess work from home and have their own device (pretty usual for small cos).

    Say revenue is 20k, employee costs as mentioned above are 10k, other expenses and taxes are 5k. This makes NOPAT at 5k for year 1. Let all of this be distributed as dividend (so no retained earnings and no addition to BV equity). Assume this does not impact steady state operations.

    Would your formula then say that ROIC is infinite given that invested capital is zero? If no, then what would it say

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