Starting with the assets side of the balance sheet the calculation of invested

# Starting with the assets side of the balance sheet

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Starting with the assets side of the balance sheet, the calculation of invested capital begins with net working capital. You can think of this as the cash a company needs in the next twelve months. This calculation starts with current assets, of which accounts receivables and inventories are generally the largest components. Current assets are then reduced by non-interest-bearing current liabilities (NIBCLs). NIBCLs are basically all current liabilities that are not debt, with accounts payable often the most sizable item. Net working capital can be less than zero for companies with a negative cash conversion cycle, where NIBCLs are larger than current assets.8These companies can sell inventory and collect cash before they have to pay their suppliers, and hence suppliers become a de facto source of financing. Negative cash conversion cycles can’t go on forever, but can go on for a very long time. Further, working capital changes are generally very sensitive to the company’s growth rate. If you see an acceleration or deceleration in the growth rate, be sure to check what’s going on with net working capital.
June 4, 2014 Calculating Return on Invested Capital6You then add net property, plant, and equipment (PP&E) to net working capital. Further, you need to add goodwillmore on that in a momentand any other operating assets required to run the business. If you are wondering about whether to include an item in invested capital, simply ask if the company could generate the same level of NOPAT without the item. If not, include it. If so, exclude it. From the liabilities plus equity side of the balance sheet, the invested capital calculation starts with total debt, both short- and long-term, and adds equity, including preferred stock or any other equity-linked securities. Finally, there are a number of other items you must capture. These include deferred taxes and other long-term liabilities, such as those related to pensions. Exhibit 3 shows the calculation of Cisco’s invested capital.Cisco’s ROIC in fiscal 2013 was 34.1 percent [\$10.4 billion/(\$33.6 billion + \$27.2 billion/2)] and 34.2 percent in 2012 [\$9.3 billion/( \$27.2 billion + \$27.3 billion/2)]. Exhibit 3: Calculation of Invested Capital for Cisco Systems, Inc. Source: Company published data and Credit Suisse. Operating approachDescription20092010201120122013ReferenceCash *1,4451,6021,7291,8421,944line 1 * 4%Accounts receivable3,1774,9294,6984,3695,470line 28Inventories1,0741,3271,4861,6631,476line 29Deferred tax assets2,3202,1262,4102,2942,616line 30Prepaid and other2,6053,1784,0524,8915,349line 31Total current assets10,62113,16214,37515,05916,855- NIBCLs13,65516,13716,91817,70018,909line 39 + line 40 + line 41 + line 42 + line 43Net working capital(3,034)(2,975)(2,543)(2,641)(2,054)+Net PP&E4,0433,9413,9163,4023,322line 33+Goodwill12,92516,67416,81816,99821,919line 34+ Intangibles1,7023,2742,5411,9593,403line 35+Other assets5,2815,8206,5897,4677,026line 36Invested capital20,91726,73427,32127,18533,616(*) cash = 4 percent of sales.