Capital employed

Capital employed is the total amount of equity invested in a business. The amount of capital employed can be derived in several ways, some of which yield differing results. The alternative formulations of capital employed are:

  • Assets minus liabilities. This is based on the book values of the assets and liabilities on a company's balance sheet, and so does not include internally-derived intangible assets.
  • Market value of all assets. This approach uses the current value of assets, but does not offset this figure with any obligations of the business.
  • Fixed assets plus working capital. This formulation does not include cash, on the grounds that an excessive cash balance could have been distributed to shareholders via a dividend or stock repurchase.
  • Fixed assets currently in use. This is the most narrow definition, focusing only on the book values of fixed assets currently involved in operations. Thus, it ignores idle fixed assets, all other assets, and all liabilities.
  • Stockholders' equity plus loans. This approach uses the book value at which shares were sold to investors, which may depart considerably from the current market value of those shares.

Whichever method is used should be employed consistently. By doing so, one can plot the level of capital employed on a trend line.

The amount of capital employed can be compared to net sales to arrive at a ratio of capital employed to sales. The result can then be compared to the same ratio for competitors, to determine which businesses are doing the best job of efficiently using their capital to generate sales.

Related Courses

Business Ratios Guidebook 
The Interpretation of Financial Statements