What is capital employed?
Capital employed is typically the total amount of capital that is used for the acquisition of profits by a firm or particular project. It can also be used to refer to the value of all of the assets that are used by a company in order to generate earnings.
Capital employed, also known as funds employed, is a figure commonly used to measure a company’s profitability and efficient use of capital.
Capital employed is helpful in the sense that it can be used alongside other financial metrics in order to properly determine aspects such as the return on a company’s assets or to see how effective management is at utilising capital.
Key takeaways from this section:
- Capital employed is a way to tell how much money has been put to use in an investment.
- Simply put, capital employed is the total amount of funds that are deployed to run the business in order to generate profit.
- The figure commonly used to calculate capital employed is: Total assets – current liabilities = Equity + Noncurrent liabilities.
Understanding the formula for capital employed
Capital employed is a way to estimate how well a company is using its capital to enhance its profitability. It refers to the value of all the assets that are employed in a business.
The formula to calculate capital employed is as follows:
Total assets – current liabilities = equity + non-current liabilities
Essentially, capital employed is calculated by taking total assets from your balance sheet and then subtracting any and all current liabilities as these are considered to be short-term financial obligations. Instead, you work out capital employed by adding equity to non-current liabilities, which are considered to be the long-term liabilities.
Capital Employed FAQs
How do you calculate capital employed?
Capital employed is calculated by subtracting current liabilities from total assets, or by adding noncurrent liabilities to owners’ equity. Capital employed is also better interpreted by combining it with other information in order to form an analysis metric, such as return on capital employed (ROCE).
What is capital employed used for?
Capital employed is used mainly by analysts to help determine return on capital employed, but is also used in many other contexts. It indicates the investment in the business and helps companies to see how well they are using their capital to improve profitability.
What is return on capital employed (ROCE)?
Return on capital employed (ROCE) is a financial ratio that is used to assess a company’s profitability and capital efficiency. It can help to understand how well a company is generating profits from it’s capital. The return on capital employed ratio is one of many profitability ratios that is used by analysts, financial managers, stakeholders and potential investors when analysing a company for efficiency and investment.
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