Invested Capital: The Quick Definition
Put simply, Invested Capital is the value of the money invested in a business over its lifetime.
In order to manufacture products or deliver services, businesses need to spend money on various items including inventory, equipment, buildings, and employees. Since businesses generally begin with no revenue, people must invest in a company through equity so that the business can purchase these items.
As a company grows, it will likely take on debt in addition to equity as another source for investment. Similar to how a homeowner will take on mortgage debt to finance a home, a business takes out a loan to purchase things that it currently cannot fully afford.
Invested Capital is like the financial history of company, revealing the path of a company from initial investment to IPO and beyond.
A company shouldn’t be able to hide from its history. Can you imagine buying a car without getting a full history report of accidents, breakdowns, and the like? You could end up with a real clunker for the price of a luxury convertible.
How Invested Capital Can Affect Valuation
Over the lifetime of a business, acquisitions, dispositions, mergers, and write-downs will greatly affect the value of invested capital. Looking at one year of financial statements disregards the entire history of a company up to that point.
Just looking at the company’s 2014 filing, CAG looks like a great investment with only $18 billion invested. However, our analysts uncovered $2.4 billion of asset write-downs, which could mislead investors into betting on a volatile investment. We did our due diligence and correctly adjusted invested capital to account for CAG’s destruction of capital.
Get the Full History of Your Portfolio Companies Today
New Constructs understands that making investment decisions off of one year of data is insufficient. Our analysts collect data for companies over a number of years to give a full picture of the company’s history and its total invested capital.
When you use insufficient data, you’re gambling. When you get the full picture, you are investing.
New Constructs reviews thousands of SEC filings, so you don’t have to. We calculate invested capital for over 3,000 companies. Get access to them all by starting your membership today.
Hunter Gray contributed to this report.
Disclosure: David Trainer and Hunter Gray receive no compensation to write about any specific stock, style, or theme.