Capital Employed

Published Jan 31, 2023

Definition of Capital Employed

Capital employed is a financial term that describes the total amount of capital that is used by a company to generate revenue. That means it includes all the assets that are used to generate income, such as cash, inventory, accounts receivable, and fixed assets.

It can be calculated using the following formula: Capital Employed = Total Assets – Current Liabilities.

Example

Let’s look at an example to illustrate this concept. Imagine a small retail store that sells clothes. Let’s say the store has a cash balance of USD 10,000, inventory worth USD 20,000, accounts receivable of USD 15,000, and fixed assets (e.g., furniture, fixtures, etc.) worth USD 25,000. On the other hand, it has current liabilities of USD 20,000. In this case, the total capital employed by the store is USD 50,000 (i.e., 10,000 + 20,000 + 15,000 + 25,000 – 20,000).

Why Capital Employed Matters

Capital employed is an important metric for investors and analysts because it helps them to assess the efficiency of a company. That means they can compare the total capital employed by a company to its total revenue and calculate the return on capital employed (ROCE). This ratio is a measure of how efficiently a company is using its capital to generate profits. Thus, it is a useful tool for investors to evaluate the performance of a potential investment and make better, more informed decisions.