Here we are given an income statement and a full balance sheet for Newcastle Plc. We are going to use this information to calculate return on invested capital and also a new term return on capital employed. Let's start by calculating return on invested capital.

We'll start with invested capital, which from the balance sheet is the equity plus debt, less cash giving invested capital of 425. The return on that invested capital, well that's the NOPAT figure that we've been given divided by invested capital giving return on invested capital of 9.4%. But what about capital employed? Well, capital employed reflects all of the capital which is employed in the operations of the business. So this needs to reflect all of the operating assets of the business. When we look at the balance sheet, we can see that the assets, the business include PP&E and the net operating working capital, and that gives us capital employed of 425. Now, the return on that capital employee, that's the return on the operating assets of the business. Well, that is gonna be the NOPAT divided by the capital employed giving us return on capital employed of 9.4%. But hang on, the return on capital employed is the same as the return on invested capital. Is that just a coincidence? Well, no, it's not. We can see that capital employed is equal to invested capital and we know from our balance sheet equation that assets equal liabilities plus equity. Now, if we rearrange this formula slightly so that we deduct cash and operational liabilities from both sides, we have a new balance sheet equation, what we can refer to as the analyst balance sheet equation. The capital which is employed in the business is equal to the capital which is invested in the business. They are simply two sides of the same coin. This means that return on capital employed is exactly the same as return on invested capital. It's the same metric just approached from different sides of the balance sheet.

Once we are comfortable with invested capital being the same as capital employed, we can extend our definition of invested capital to include items beyond just net debt and equity, which is more realistic for a real company.

Invested capital may include things like non-controlling interests, preference shares, and even debt equivalents such as leases and pension liabilities. Equally, the company might have assets within its asset base, which are not part of the operations, what we refer to as non-core assets. Since these assets are not generating operating profit for the company, they're instead generating investment returns or other returns. They're not part of the operations and we deduct them in our calculation of invested capital. Note that net invested capital still equals capital employed as the balance sheet still balances.