How to Calculate Capital Employed with formula




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

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Uses of calculating the Capital Employed




One of the major uses of calculating and estimating capital employed is that it is used to calculate return over capital employed ratio. The return over capital employed is a ratio that is used equally in account finance and valuation matters of a company. The return over capital employed ratio can be calculated by the formula as described below:-

Return over Capital Employed Ratio = Net Operating Profit after Taxes/ Capital Employed
The major purpose of calculating return over capital employed ratio is that it is used to compare the returns over the investment of a company. The return over capital employed ratio is somewhat similar to return over assets ratio. The net operating profit for the calculation of this ratio can be calculated as follows. 

Net operating profit after Taxes= EBIT x (1- tax) 

The operating income here is the operating income less taxes less non-operating items
Return over capital employed ratio is used to measure the valuation of the business that it has gained from its current assets and liabilities. The return on capital employed ratio that have a lot of land in form assets will have lower ratio of return over the capital employed. Return ob capital ratio is basically a tool to analyze that how much business is gaining from its assets and how much it is loosing from its current liabilities. 

The return over capital employed ratio has a certain drawbacks as well such as it is used to measure the return in opposition to the book value of the assets of the business. The return of capital employed will increase in the case of depreciation of the assets even if the cash flow for that time period remains same. This means the business having depreciated assets have high ratio of return over capital employed as compared to the new businesses

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Accounting for Management - Accounting theme from Business Law.