Capital employed has many definitions and is not easily analysed. In general, it represents the
capital investmentnecessary for a businessto function. Consequently, it is not a measure of assets, but of capital investment: stockor sharesand long-term liabilities.
Capital employed is usually represented as total assets less current liabilities, or
non-current assets plus working capital:
Capital Employed = Non-Current Debt and Equity provide obvious sources of long-term funding, but a further source is provided by the short-term debt that remains on the balance sheet at the year end. The sum of these sources of long-term funds is termed capital employed.
Use in financial analysis
Capital employed is used mostly for calculating
return on capital employed(ROCE), an alternative to return on equity(ROE) and return on assets(ROA) ratios.
Capital employed can be defined as equity plus loans which are subject to interest or one can say that it is total assets less non bearing interest liabilities.
Capital employed can be defined as shareholders funds (ie. Share capital and reserves) plus creditors > 1 year (long-term liabilities) plus provisions for liabilities and charges.NB. This MUST equal Total assets less current liabilities.
Capital employed is the value of the assets that contribute to a company's ability to generate revenue, ie. their liquidity.
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