Measuring invested capital

[scorpioncapital]

How do folks calculate invested capital?

 

I look at paid in capital + retained earnings but not sure what to make of buyback stocks held in treasury. Should this be ignored?

How about dividends paid out over the years?

 

 

[Okonomen]

The quick n dirty approach could be to use net debt + equity. In this way you capture a lot of capital, but also e.g. goodwill which is something that is okay to include when measuring mgmt but it does not reflect the true reinvestment ROIC of the business.

 

So you could also take e.g. operating assets less operating liabilities. So at all asset items askyourself "is this needed to operate the business?". Examples of operating assets: PP&E, receivables, inventory, many also include deferred tax etc. Everything that stems from operating the business. All interest bearing items are excluded (meaning all finance items such as cash, interest bearing investments etc. You can include some operating cash of e.g. 1% of sales, so if the company has 100 mio. in cash and 100 mio. in revenue annually you can include 1 mio. of operating cash)

 

Then look at operating liabilities and ask: Does this stem from operating the business? e.g. operating liabilities include payables, accrued liabilities, deferred revenue etc. Exclude all debt and equity

 

When you got the operating assets and operating liabilities, subtract the op liab from op assets. That's your IC

 

Read here: https://plus.credit-suisse.com/rpc4/ravDocView?docid=P8BJ3Y

[scorpioncapital]

That's an amazing article, thanks. CS has returned my faith in investment banking )

 

[Okonomen]

Yeah their pretty good with their math and calculations. Terribly shortsighted herd followers, however