Capital employed refers to the amount of capital investment a business uses to operate. It can help indicate how a company is investing its money. <\/p>\n\n\n\n
This guide explains everything you need to know about how to calculate capital employed.<\/p>\n\n\n\n
Capital employed, or funds employed, is one of many financial metrics and refers to how much capital a company has invested into itself through means such as purchasing equipment, hiring employees and so on. It can also refer to how much capital has been used for a particular project, whether that\u2019s opening stores in other locations or developing new products. <\/p>\n\n\n\n
Capital employed is often used to measure a company\u2019s profitability and efficient use of capital. <\/p>\n\n\n\n
The most commonly used formula to calculate capital employed is as follows:<\/p>\n\n\n\n
Essentially, capital employed is calculated by taking the total assets from the company\u2019s balance sheet and then subtracting all current liabilities, or short-term financial obligations. <\/p>\n\n\n\n
It\u2019s also possible to calculate capital employed with the following formula:<\/p>\n\n\n\n
Fixed assets<\/a> are assets purchased for long-term use, such as property, plant and equipment. Working capital is the capital available for daily operations and is calculated as current assets minus current liabilities. <\/p>\n\n\n\n Whichever formula you use, make sure you stick with it \u2013 do not switch between them when making comparisons as the calculation will differ depending on which formula you go for.<\/p>\n\n\n\n Capital employed can give you an overview of how well a company is investing its money to generate profits. Capital investments could include stocks and long-term liabilities. It also produces a simple measure of the value of assets held by a business against current liabilities. Both of these measures can be found on the company\u2019s balance sheet. A current liability is the portion of debt that will need to be repaid within a year.<\/p>\n\n\n\n Overall, calculating capital employed makes it clear whether a business has the assets it needs to cover all the debts that might need to be repaid in a short space of time. If this is not the case, it will show that the business has not been investing its capital effectively.<\/p>\n\n\n\n Capital employed is better interpreted by combining it with other information to form an analysis metric, such as return on capital employed (ROCE). ROCE is a financial ratio that\u2019s used to assess a company\u2019s profitability and how well a company is generating profits from its capital. Analysts, investors and stakeholders use the return on capital employed ratio when analysing a company as it can be a better gauge for the performance or profitability of a company over a longer period of time. Investors use it to help work out what their return might be in the future. <\/p>\n\n\n\n A higher ROCE generally suggests a more efficient company. However, it could also indicate a company with a lot of cash on hand as cash is included in total assets. This means high levels of cash can sometimes skew this metric. <\/p>\n\n\n\n To calculate ROCE, you need to divide net operating profit, or earnings before interest and taxes (EBIT), by capital employed. You can also calculate it by dividing earnings before interest and taxes by the difference between total assets and current liabilities.<\/p>\n\n\n\n Try our handy calculator<\/a> today!<\/p>\n\n\n\n Generally, the higher the ROCE value, the better. A good rule of thumb is that you should be aiming for a ROCE of at least 15% to 20%. However, the averages will differ depending on the industry you\u2019re in. For example, in manufacturing, ROCE can be more than 25%, while in retail, it can range from 5% to 15%.<\/p>\n\n\n\n A business should be looking to generate a ROCE that is consistently more than its weighted average cost of capital, or WACC. Put simply, this means it needs to make a bigger return on the money spent funding the business than the average cost of that funding (from both debt and equity). <\/p>\n\n\n\n Let\u2019s take a look at an example. The following financial information applies to Company XYZ:<\/p>\n\n\n\nWhat does this tell you?<\/h3>\n\n\n\n
Calculating return on capital employed (ROCE)<\/h2>\n\n\n\n
What is the average ROCE?<\/h3>\n\n\n\n
Example capital employed calculation<\/h2>\n\n\n\n