Invested Capital
Candlefocus EditorWhen the Invested capital is successfully utilized by a company, it can potentially generate a return on investment (ROI) that can help a company work towards achieving its goals and objectives. The ROI is calculated by taking the profits (or loss) generated by a company and dividing it by the total value of each Capital invested.
A company's Weighted Average Cost of Capital (WACC) also helps to determine how much it costs the company to keep its Invested capital. This weighting factor is based on the company’s cost of equity and debt sources and can vary depending on the type and amount of each of these sources.
The weighted average cost of capital helps a company to decide how much it should invest, if it is to maximize its return on invested capital. Having a better idea of how much it costs the company to keep the Invested capital allows the company to generate a proper budget and adjust how much it spends.
By examining the return on investment, weighted average cost of capital and the overall value of Invested capital, businesses can have a better idea of what investments are profitable and which are not. By constantly calculating and examining this dynamic relationship companies can fine-tune and optimize their investments to maximize returns. Invested capital is essential to any successful organization and is a major component of long-term business planning.