Capital Employed

What is Capital Employed?

Capital employed is the amount of a company’s capital investment in the operation. This also shows an indication of how a company invests money. The capital put in use is generally referred to as the capital used to generate profits.

A company’s Balance Sheet shows the information necessary to understand and calculate the capital employed. It helps understand how the company’s management invests the money. The difficulty here is that there are various contexts in which the capital employed can exist.

A simple way of presenting capital employed is to subtract total assets from Current Liabilities. In some cases, it is also equal to all current equity added non-current liabilities.

Capital employed is basically used by analysts to understand the return on capital employed (ROCE). Returns on capital employed are through a profitability ratio. Higher return on capital employed suggests a very profitable company in terms of capital employed. A higher efficient can also be indicative of a company with a lot of cash in hand is included in total assets. Capital employed can be understood by combining it with a return on the capital employed method (ROCE).

Return on capital employed is calculated by dividing the net operating profit or EBIT (Earnings before interest and Taxes) by capital employed. One other way to do it is calculating it by dividing Earnings Before Interest and taxes by the difference between total assets and current liabilities.

Formula of Capital Employed

Capital employed= Total assets- Current liabilities

• Total Assets is the total Book Value of all assets.
• Current Liabilities is the liabilities which due within a year.
• Fixed Assets are also known as capital assets. These are assets that are bought for long-term use are important for the operation of the company.
• Working Capital is the capital that is put to use for daily operations and is calculated as current assets subtracted from current liabilities.

Capital employed can be calculated by taking the total assets from the balance sheet and subtracting current liabilities. It can be calculated by adding fixed assets into working capital.