Capital employed definition
/What is 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 noted below. Whichever method is used should be employed consistently. By doing so, you 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.
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The Interpretation of Financial Statements
Assets Minus Liabilities
The assets minus liabilities concept of capita employed 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. It also does not factor in any changes in the fair values of the assets and liabilities being held.
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. It does not factor in any assets that have not been recorded in the organization’s balance sheet, such as its internally-generated intangible assets.
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 a 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.