What is meant by equity and invested capital?
We usually value either an invested capital or equity interest in a business. Generally speaking, equity means net worth, or assets minus liabilities. The value of invested capital (sometimes called enterprise value or asset value), is the debt free value of an enterprise. A simple example of invested capital value is when a real estate appraiser values a residential property at, say, $500,000. The appraiser is not concerned with how much is owed on the property, thus the $500,000 value is being reported on an invested capital basis. If we subtract the debt owed on the home (all liabilities in the case of a business), let’s say $275,000 in this example, the owner’s equity value would be $225,000.
