Glossary
 Invested Capital 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 revenue is derived. It can be calculated two mathematically equivalent ways as shown in Figure 1. Figure 1 Formula for Invested Capital * NIBCLs - stands for Non-Interest-Bearing Current Liabilities * * Includes leased assets Source: New Constructs, LLC Below are the primary accounting distortions in reported financial statements that require economic translation and adjustment for the Invested Capital calculation. Capitalized Expense Excess Cash LIFO Reserve Other Non-cash Reserve Deferred Revenue 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 Over/Under-funded Pensions 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.
 NOPAT The after-tax operating cash generated by the business, excluding non-recurring losses and gains, financing costs, and goodwill amortization and including the compensation cost of employee stock options (ESOs). It can be calculated two mathematically equivalent ways: Figure 2 Formula for NOPAT Source: New Constructs, LLC Below are the primary accounting distortions in reported financial statements that require economic translation and adjustment for the NOPAT calculation. Capitalized Expenses Income from Unconsolidatebcinstuwd Subsidiaries Restructuring/Non-recurring Charges All Non-operating Items below EBI All After-tax Items Value of Employee Stock Options (ESOs) issued in a given year Operating Leases Over/Under-funded Pension Unlevered NOPAT Per Share EqualsNOPAT/Basic Shares Outstanding. Note that we use Basic Shares Outstanding because we account for Employee Stock Option expenses in our calculation of NOPAT NOPAT Margin is equal to NOPAT/Total Operating Revenues.
WACC

Weighted-Average Cost of Capital (WACC) is the average of debt and equity capital costs that all publicly traded companies with debt and equity stakeholders incur as a cost of operating. Below we provide the details behind our WACC calculations.

Cost of Equity
• Our cost of equity calculation is based on the Capital Asset Pricing Model methodology.
• We use the market value of equity when calculating all Total Adjusted Market Capital ratios.
• The Equity Risk Premium is calculated as the average of the current implied Equity Risk Premium and the historical implied Equity Risk Premium.
• Though there are many other more complicated approaches for arriving at a firm's cost of equity, we do not feel their additional complexity offers commensurate accuracy. CAPM is simple, gets us close enough and it is easy to implement consistently across all companies we analyze.
• For Beta, we use consistent values to avoid this variable having an inappropriately large impact on the WACC calculation. We apply industry and sector averages for beta to individual companies. Industry and sector averages are based on the actual individual company betas, which we calculate based on daily prices over the past 5 years. We assign the industry or sector averages where we see individual beta values clustered most uniformly within industries or sectors, respectively.
Cost of Debt
• The cost of debt capital should represent the business' long-term marginal borrowing rate.
• The Risk-Free Rate (RFR) is approximated by the 30-year Treasury Bond. If the 30-year rate is not available, the 20-year rate is used.
• To the RFR, we add the debt spread associated with the debt rating on the company's long-term debt.
• The resulting pre-tax cost of debt is then multiplied by (1 - marginal tax rate).
• We use debt ratings from Moody's or S&P.
 WACC Formula WACC = ( Ke ) * (E/TC) + (Kd * (1-T)) * (D/TC)+Kp * (P/TC) Where Ke = Cost of Equity E = Total Equity Kd = Cost of Debt D = Total Debt Kp = Cost of Preferred P = Preferred Capital E/TC = Equity Total Adjusted Market Capital Ratio D/TC = Debt to Total Adjusted Market Capital Ratio P/TC = Preferred Stock to Total Adjusted Market Capital Ratio T = Tax Rate