Invested Capital and Excess Cash

Eq (1) : Total Equity + Total Debt - Excess Cash - Investments

• Excess Cash = Cash a company has that is not required to operate the business.
• Investments 
• investment in quoted or unquoted shares
• investment in properties (for a non property development company)
• investment in associate companies or JV (which account is not being consolidated into the group's account)
• Why Net out Excess Cash & Investment?
• Interest Income from Cash + Return from investments is not part of operating income.
• Dividing Operating Income by Total Book Value - yield too low for a return on capital for companies with significant cash balances.
• If we add back interest income (from cash) & return from investment to the numerator - it is not a fair measurement as interest income is low risk & low return investment
• Thus, the reason is to be consistent with the use of Operating Income as Earning measurement.

Eq (2) : Total Assets - Non-interest bearing Current Liabilities - Excess Cash - Investments

• Using the book value of assets to replace the book values of debt and equity
• Total equity + total debt in Eq (1)  =  Total Assets – Non-interest bearing Current Liabilities in Eq (2)

Eq (3): Fixed Assets + Current Assets - Non-interest bearing Current Liabilities - Excess Cash - Investments

•  From Eq (2), Total assets = Fixed Assets + Current assets in Eq (3) 

Eq (4): Fixed Assets+ Non Cash /Investment Net Working Capital

Eq (5): Fixed Assets + Receivables + Inventories - Payable

• Fixed asset - PPE, long-term lease payment, investment properties for a property company, biological assets for a plantation company [but not take in all assets ] 
• Other non-current assets, e.g. long-term investment, tax payable, retirement benefits etc - it is not a invested capital in their real sense (It is arguable). 
• Other current assets, e.g. tax credit, etc is removed.
• Other current liabilities, e.g.  tax payable, dividend payable etc not consider as part of the working capital.
• Accounts payable - subtract it from IC is because it represents capital invested in the business by a company’s suppliers or contractors, not the company itself.  
• If you use Eq (2), you are unknowingly taken them as part of the IC which is why it is different from if you use Eq (5). 
• Eq (5) is what Greenblatt used in his magic Formula.

Excess Cash

• Company carry some cash and equivalents to meet short-term obligations, pay dividends, buy back stock, make acquisitions, etc. 
• It may carry short-term investments, such as money market fund. 
• Both of them can be grouped together and call it "Cash".
• Invested capital is a firm's physical plant, receivables, inventory, and so forth.
• Cash isn't really invested capital used to generate the company's revenues and profits. It should be subtracted out when calculate the Invested capital. 
• Cash acts as a discount on the purchase price of the company. E.g. pay $1B to buy company with $250M cash in bank (and no debt) - in essence, you are only paying $750M  -- This is why we subtract cash out from the enterprise value.
• Excess Cash = Cash is not required to met short term obligations which are listed in current liabilities. 
• Excess Cash = Cash - Total Current Liabilites
• But, we might able to use the current asset to cover the current liabilities instead of using cash only
• Excess Cash = (Cash - Current Liabilites) + (Current Asset - Cash)
• While, Excess Cash shouldn't > Cash 
• Excess Cash = Cash - Max[0, {CL - (CA - Cash}]
• TEV = Market Capitalization +Total Debt + Minority Interest - Excess Cash --> We have already added all "Debts" in the equation as total debts. If we were to consider this "debt" in the "excess cash" term and hence get a negative "excess cash", the EV will be jacked up higher.  
• Excess Cash = Cash - Max[0, {(CL - Short Term Debt) - (CA - Cash}]
• For a company has too much current liabilities, it might have a deficit of cash - it need to find cash from somewhere (right issues? borrowing? etc... to meet short term obligation) --> and, ultimately this would increase invested capital, and increase the enterprise value.

References:-

• What is invested capital and excess cash and how to estimate them kcchongz (private)