Learn: Capital Employed - Meaning and Calculation

Welcome!Great to see you again! Building on your understanding of working capital and balance sheets, today we'll explore capital employed. It's an important concept that shows how much a business is investing in its operations.

What is Capital Employed?Capital employed refers to the total resources used by a business to generate profits and operate effectively. It includes shareholder funds and any long-term liabilities.It helps measure the overall financial health and efficiency of a business.

Why is Capital Employed Important?Knowing capital employed allows businesses and investors to understand how much money is being used to generate returns. It also helps calculate key financial ratios like Return on Capital Employed (ROCE), which measures how effectively a company is using its capital.

How to Calculate Capital EmployedCapital employed can be calculated using this formula: Total Assets - Current Liabilities. Alternatively, you can add shareholder funds and long-term liabilities.Both methods give the same result and are commonly used in business analysis.

Components of Capital EmployedCapital employed is made up of two main components:Shareholder Funds: This includes share capital and retained earnings.Long-Term Liabilities: These are debts that a business owes but doesn’t need to repay immediately, like loans or bonds.

Return on Capital Employed (ROCE)ROCE is a key financial ratio that shows how efficiently a business is using its capital to generate profits. The formula is:ROCE = (Operating Profit ÷ Capital Employed) × 100

Review Time!Great work! You've learned about the meaning, calculation, and importance of capital employed. Now let’s test your understanding with a few questions.

Well Done!You've completed the lesson on capital employed. You've learned what it is, why it's important, and how to calculate it. Keep practising to strengthen your understanding!