There is a very easy and simple formula to calculate capital employed regarding a particular business. In order to calculate capital employed we require total assets and the current liabilities of a firm. The formula of capital employed is as under:-
Capital Employed = Total Assets – Current Liabilities
In other words the capital employed for a firm is equal to the non-current debt and the owner’s equity that is invested in his business. The non-current debt and the equity are the sources of long term financing for the business. Other sources of the capital employed are the short term debts that are also a good source of financing but they remain visible at the end of the balance sheet of that particular year. The formula shows that capital employed involves the total assets of a business. The total assets of the business consist of owner’s equity and capital derived from shares of the company. Total assets of a company also include the fixed assets and the current assets of the company. Another factor included in the total assets of the firm is the gross borrowings of the firm.
Another formula to calculate capital employed is based on the figures of equity and loans. This formula is described as under:-
Capital Employed = Equity + Loans
Here the loans are the considered to be the non-interest bearing liabilities of the firm.
If you want to break down the assets and liabilities to calculate the capital employed by a firm you can use the formula as mentioned below:-
Capital Employed = Share Holder Funds + Creditors Long Term Liabilities + Provisions of Liabilities and charges
In more clear terms see the formula mentioned below:-
Capital Employed = equity share capital +pre share capital +debenture capital + long term loans