Corporate Finance Theory and Practice, Third Edition

Chapter 4

CAPITAL EMPLOYED AND INVESTED CAPITAL

The end-of-period snapshot

So far in our analysis, we have looked at inflows and outflows, or revenues and costs during a given period. We will now temporarily set aside this dynamic approach and place ourselves at the end of the period (rather than considering changes over a given period) and analyse the balances outstanding.

For instance, in addition to changes in net debt over a period, we also need to analyse net debt at a given point in time. Likewise, we will study here the wealth that has been accumulated up to a given point in time, rather than that generated over a period.

The balance represents a snapshot of the cumulative inflows and outflows previously generated by the business.

To summarise, we can make the following connections:

• an inflow or outflow represents a change in “stock”, i.e. in the balance outstanding;
• a “stock” is the arithmetic sum of inflows and outflows since a given date (when the business started up) through to a given point in time. For instance, at any moment, shareholders' equity is equal to the sum of capital increases by shareholders and annual net income for past years not distributed in the form of dividends plus the original share capital.

Section 4.1

THE BALANCE SHEET: DEFINITIONS AND CONCEPTS

The purpose of a balance sheet is to list all the assets of a business and all of its financial resources at a given point in time.

1/ MAIN ITEMS ON A BALANCE SHEET

Assets on the balance sheet comprise: ...