I’ve seen invested capital defined two ways:
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Net fixed assets + noncash working capital
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BV of debt + BV of equity
I’m confused why it has these two definitions? The former excludes long term debt. Shouldn’t that be included?
It really depends on how you define it, there are no set formulas or rules for a lot of accounting terms, mostly because treatment of accounts and statements differ between countries and companies.
But generally, the most correct defeinition of invested capital in terms of corporate valuation is the following. Invested capital are the assets accumlated for the purpose of gaining operating revenue, through debt and equity financing. Any non-operating asset is not included, likewise for capital raised for non-operation purposes. Using the invetment method, it is generally defined as operating asets - operating liabilities, or OA- OL. The breakdown of the equation is working cash (around 2% of revenues) + Net fixed assets + operating working capital + operating intangibles (software) + capitalized R&D expenses + capitalized operating leases + unamoratized accumulated good-will (optional to include this depending on the type of analysis).
If other long-term assets and liabilities are small—and not detailed by the company—we can assume they are operating. To determine net other long-term operating assets, subtract other long-term liabilities from other long-term assets. This figure should be included as part of invested capital. If, however, other long-term assets and liabilities are relatively large, you will need to disaggregate each account into its operating and nonoperating components before you can calculate net other long-term operating assets.
The financing approach to estimating invested capital can be a little inaccurate for obvious reasons, which equals to BV of = long-term debt - short-term debt + equity. So it’s best to do the more direct approach instead.