What is Capital Employed?
Capital employed indicates the investment in the business, the total amount of funds used for expansion or acquisition by a firm as well as the total value of assets dedicated towards the business and is calculated by subtracting current liabilities from total assets or by adding working capital to fixed assets.
In Simple words, Capital Employed is the total funds deployed for running the business with the intent to earn profits and is usually calculated in two ways a) Total Assets minus Current Liabilities or b) Non-Current Assets + Working Capital
A higher value of Capital Employed, especially when a significant chunk of it is not sourced from shareholders’ equity, indicates a proportionately higher level of risk. Though the higher level of risk might make investors wary of investing in the company, it also hints at aggressive business expansion plans, which, if successful, could result in much higher returns as well on investments.
Capital Employed Formula
- Here total assets include fixed assets at their net value. Some prefer to use the original cost, but some others use replacement cost after depreciation.
- To this is added any Cash in hand, cash at bank, bills receivable, stock, and other current assets.
- Finally, all capital investments in businessCapital Investments In BusinessCapital Investment refers to any investments made into the business with the objective of enhancing the operations. It could be long term acquisition by the business such as real estates, machinery, industries, etc. operations are added to these items to arrive at the value of total assets in this calculation.
- Next, subtract current liabilities from the value arrived at for total assets.
Non-current assets are the long-term assets, whose full value cannot be realized within the current financial year. It typically includes fixed assets along with intangible assets, brand recognition, and intellectual property. This formula also includes any investments made in other businesses.
Working capital can be defined as a quick measure of the operational efficiency of a company and its overall financial health.
Working Capital = Current Assets – Current Liabilities.
All of the figures utilized for Capital Employed calculationCapital Employed CalculationCapital employed indicates the company's investment in the business, i.e., the total amount of funds used for expansion or acquisition and the entire value of assets engaged in business operations. "Capital Employed = Total Assets - Current Liabilities" or "Capital Employed = Non-Current Assets + Working Capital." can be found on the balance sheet of the company.
Calculation using 1st Formula
- To calculate this for Company ABC based on the first method, we look for the figure against “Total assets.” Let us suppose it is $42000000.
- Next, we look for the figure against “Total Current Liabilities,” as listed in the balance sheet. Let us suppose this figure is $25000000.
Now, we calculate like this:
- CE = Total Assets ($42000000) – Current Liabilities ($25000000) = $17000000
Calculation using 2nd Formula
The second method would require looking up for the following measures on the balance sheet of Company ABC, non-current assets, current liabilities, and current assets. We can find both current assets and non-current assets listed in the Assets section of the balance sheet and current liabilities on the Liabilities section.
- Let us suppose, Non-Current Assets = $105 Million
- Current Liabilities = $54 Million
- Current Assets = $65 Million
- Now, we calculate like this:
- CE = Non-Current Assets ($105000000 + Working Capital (Current Assets ($65000000) – Current Liabilities($54000000))
- = $105 Million + $11 Million = $116 Million
Use and Relevance
Generally, it is put to good use in estimations on how well a company might be using its capital to enhance its profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance.. It is achieved by calculating Return on Capital EmployedReturn On Capital EmployedReturn on Capital Employed (ROCE) is a metric that analyses how effectively a company uses its capital and, as a result, indicates long-term profitability. ROCE=EBIT/Capital Employed.
EBIT is also known as operating income, which is divided by the figure for employed capital to get ROCE. It is especially useful in comparing the utilization of capital in companies operating in capital-intensive industries.
Capital Employed Calculator
You can use the following Calculator
|Capital Employed Formula =||Total Assets – Current Liabilities|
|0 – 0 =||0|
Capital Employed in Excel (with excel template)
It is straightforward. In the first method, You need to provide the two inputs of Total Assets and Total Current Liabilities. And in the second method, you need to provide the three inputs of Non-Current AssetsNon-Current AssetsNon-current assets are long-term assets bought to use in the business, and their benefits are likely to accrue for many years. These Assets reveal information about the company's investing activities and can be tangible or intangible. Examples include property, plant, equipment, land & building, bonds and stocks, patents, trademark., Current Liabilities, and Current Assets.
Calculation by First Method
Calculation by Second Method
You can download this template here – Capital Employed Excel Template
Video on Capital Employed Ratio
This article has been a guide to Capital employed and its definition. Here we discuss the formula to calculate Capital Employed along with practical examples and its uses and downloadable excel template. You may also refer to the following to learn more about Financial Ratios