Invested capital

Build it in three blocks, straight off the re-sorted balance sheet:

Block 1 is net operating working capital (NWC):

NWC = (Receivables + Inventory + other operating current assets [+ operating cash, if held back])
      − (Trade payables + accrued expenses + other operating current liabilities)

Watch the exclusions on both sides. Excess cash and liquid investments are not operating current assets. Short-term borrowings and the current portion of debt/leases are not operating liabilities either. They're financing, no matter where Schedule III or the 10-K prints them. And think about what subtracting payables means economically. Suppliers who let you pay in 60 days are financing your inventory for free, so less investor capital is needed. That's how FMCG companies and retailers with negative working capital show spectacular ROICs. Their customers pay instantly and their suppliers wait. Part of their moat is that other people fund their operations.

Block 2 is net fixed and other long-term operating assets: net PP&E + capital work-in-progress + right-of-use assets + operating intangibles + other long-term operating assets (security deposits, capital advances).

Block 3 is goodwill, in or out. Use both, always. You keep a double view, and the goodwill section explains what each version answers.

Invested capital (operating) = NWC + net fixed & other operating assets [+ goodwill]

Invested capital II: the financing approach, and the reconciliation

You get the same number from the other side of the sheet. This time you're asking who supplied the capital:

Invested capital (financing) = Total borrowings (ST + LT)
                             + lease liabilities (current + non-current)
                             + shareholders' equity
                             + minority interest
                             + quasi-equity (net deferred tax liability)
                             − cash & liquid investments (the non-operating part)
                             − other non-operating assets

Two of those lines need a reason. Start with minority interest. Consolidated EBIT includes 100% of every subsidiary's profit, as you saw in consolidation, so the denominator must include 100% of the capital funding those subsidiaries, including the slice owned by outside shareholders. Numerator and denominator must cover the same claimholders. Then the deduction of non-operating assets. Investors' money sitting in mutual funds isn't invested in the business. You deduct it here because you excluded its income from NOPAT.

That's the matching rule, and it's the master debugging principle of the build. Every asset in the denominator must produce income in the numerator, and every income in the numerator must have its asset in the denominator. Any mismatch corrupts the ratio without announcing itself. It might be investment income kept in NOPAT while the investments are deducted from IC. It might be lease assets included while rent stays unadjusted.

What does a full invested capital reconciliation look like?

Here's the full reconciliation on one company, Kaveri Fasteners Ltd (synthetic; ₹ crore; FY25 balance sheet):

Start with the operating approach. NWC = (240 + 310 + 50) − (260 + 90) = 600 − 350 = 250. Fixed & other operating = 700 + 90 + 40 = 830. IC ex-goodwill = 1,080, and IC with goodwill = 1,190.

Now the financing approach. Debt (70 + 330) + leases (15 + 80) + equity 985 + minority 25 + DTL 45 = 1,550. Take off cash & funds (180 + 120) and investment property 60, and you get 1,550 − 360 = 1,190. It ties to the rupee.

How do you turn invested capital into ROIC?

What does Kaveri earn on that? Its P&L shows revenue of 2,400 and clean operating EBIT of 360. Its reported PBT of 376 also contained ₹24 of other income from the funds and property and a ₹30 exceptional gain on land, offset by ₹38 interest. You've stripped all of that, or it doesn't concern you. NOPAT at t = 25% is 360 × 0.75 = 270, so ROIC = 270 ÷ 1,190 = 22.7%. That uses ending capital, because with only one balance sheet you have no choice. Given two, use the average of opening and closing IC, since the year's profit was earned on capital that grew through the year. Against a ~12% Indian hurdle, that's a spread of nearly +11 points. It's a good business, if the spread persists (how long spreads survive) and if it can reinvest at it (incremental ROIC).

Now put a number on the refinement. Hold back operating cash of 2% of revenue (₹48). NWC rises to 298, IC to 1,238, and ROIC dips to 21.8%.

Did the verdict move? No. Placement judgments shift the number by a point or two, and they rarely flip a conclusion. Make reasonable choices, state them, and be consistent across years and peers.