Net Investment in Operating Capital

Net investment in operating capital for a period is the increase in total net operating capital during the period. It represents the amount of new investment in operating assets to fund a company's new level of operations.

Net investment in operating capital is the amount that is subtracted from net operating profit after tax (NOPAT) to find the free cash flow (FCF).

Formula

Net investment in operating capital = closing total net operating capital − beginning total net operating capital

Total net operating capital = net operating working capital + long-term operating assets

Example

Find net operating working capital using the following information:

01-Jan-1331-Dec-13
Net operating working capital40,000,00045,000,000
Long-term operating assets80,000,00094,000,000

If net operating profit after tax for the year ended 31 December 2013 is $32,000,000, also find the free cash flow for the year.

Solution

Total net operating working capital as at 1 Jan 2013 = $40 million + $80 million= $120 million

Total net operating working capital as at 31 Dec 2013 = $45 million + $94 million= $139 million

Net investment in operating capital = $139 million − $120 million = $19 million

Free cash flow for financial year 2013 = $32 million − $19 million = $13 million

Written by Obaidullah Jan, ACA, CFA and last modified on

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