Capital employed

Capital employed has many definitions and is not easily analyzed. In general, it represents the capital investment necessary for a business to function. Consequently, it is not a measure of assets, but of capital investment: STOCK or shares and long-term liabilities.

Definition

Capital employed is usually represented as total assets less current liabilities, or non-current assets plus working capital:

CapitalEmployed = Non − CurrentAssets + CurrentAssets − CurrentLiabilities
or
CapitalEmployed = Non − CurrentAssets + WorkingCapitalRequirements

A further approach to assessing the stability of funding is to calculate the total long-term funds used by a company. Long-term debt, non-current liabilities, long-term provisions 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.

Definition

Capital employed is Fixed assets plus current assets minus current liabilities. Capital employed is the value of the assets that contribute to a company's ability to generate revenue.