Capital Employed

Financial analysis Print Email

Meaning and definition of Capital Employed

Generally, capital employed is presented as deducting the current liabilities from the current assets. It can be defined as equity plus loans which are subject to interest. To define it properly, capital employed can be expressed as the total amount of capital that has been utilized for acquisition of profits. It also refers to the value of all assets (fixed as well as working capital) employed in a business.

As explained by Investopedia, capital employed is a term that s used commonly, but is a little difficult to be defined for it is used in different contexts. However, all the definitions usually refer to the investment required for the functioning of a business. “Employing capital” indicates making an investment in the business.

Formula for Capital Employed

The general formula used for computing capital employed is:

Capital employed = Total Assets – Current Liabilities = Equity + Non-current Liabilities

Calculating Capital Employed

Generally, the capital employed can be calculated through two methods as mentioned below:

Method 1

The first method involves calculating capital employed from the assets side and is worked out by 5the adding up the following:

I. The fixed assets are included in their net values, be it original cost or the replacement cost after depreciation. In times of inflation, it is advisable to count fixed assets at the replacement cost which is actually the current market value of the assets.

II. Investments into the business.

III. All current assets like cash in hand, sundry debtors, cash at bank, bills receivable, stock, and similar more.

IV. To determine the capital employed, current liabilities are subtracted from the total assets

Method 2

As an alternative to the first method, capital employed can also be calculated from the liabilities side of a balance sheet. While calculating form the liabilities side, he following items will be included:

I. Share capital which includes issued share capital (Equity + Preference)

II. Reserves and Surplus that includes General reserve, Capital reserve, Profit & Loss account, Debentures, and other long term loans.

III. To evaluate the capital employed, the sum of liabilities mentioned above is deducted from the total assets’ worth. 

Quote Guest, 9 November, 2016
how is capital employed = current assets - current liabilities?? Isn't that simply working capital? Shouldn't capital employed = working + fixed capital??
Quote Guest, 24 November, 2016
I thought Capital Employed = Shareholders Funds + Long term liabilities !! From the points above looks like I was taught wrong previously ???
Quote Guest, 10 June, 2018
Total asset= total liabilities
So total asset- current liabilities= shareholders fund+ long term liabilities
Quote Guest, 11 August, 2018
A company has a gearing ratio of 65% and Long Term Liabilities of R700 000. What is their Capital Employed for Year 1?
Quote Kreshanu Koul, 28 August, 2018
Quote Nanda, 13 October, 2018
Whether proposed divided deducted while calculate of capital employed or not
Quote Guest, 20 October, 2018
Why current liabilities are deducted to calcilcal capital employed??
Quote Guest, 2 April, 2019
Whether proposed dividend will deduct while calculating capital employed
Quote Guest, 5 November, 2019
total of balance sheet - capital wip , short term loan and advances and investment
Quote Guest, 3 May, 2021
Non‐current assets (NBV)    75
Current assets (including inventories $25m) 45
Current liabilities (32)

average capital employed =?

Login to ReadyRatios


Have you forgotten your password?

Are you a new user?

Login As
You can log in if you are registered at one of these services: