what is capital employed 
capital employed also known as funds employed is the total amount of capital used for the acquisition of profits by a firm or project capital employed can also refer to the value of all the assets used by a company to generate earnings by employing capital companies invest in the long term future of the company capital employed is helpful since it s used with other financial metrics to determine the return on a company s assets as well as how effective management is at employing capital understanding capital employedcapital employed can give a snapshot of how a company is investing its money however it is a frequently used term that is at the same time very difficult to define because there are so many contexts in which it can be used all definitions generally refer to the capital investment necessary for a business to function capital investments include stocks and long term liabilities it also refers to the value of assets used in the operation of a business in other words it is a measure of the value of assets minus current liabilities both of these measures can be found on the balance sheet a current liability is the portion of debt that must be paid back within one year in this way capital employed is a more accurate estimate of total assets capital employed is better interpreted by combining it with other information to form an analysis metric such as return on capital employed roce formula and calculation of capital employedcapital employed total assets current liabilities equity noncurrent liabilities begin aligned text capital employed text total assets text current liabilities text equity text noncurrent liabilities end aligned capital employed total assets current liabilities equity noncurrent liabilities capital employed is calculated by taking total assets from the balance sheet and subtracting current liabilities which are short term financial obligations capital employed can be calculated by adding fixed assets to working capital or by adding equity found in the shareholders equity section of the balance sheet to noncurrent liabilities meaning long term liabilities return on capital employed roce capital employed is primarily used by analysts to determine the return on capital employed roce like return on assets roa investors use roce to get an approximation of what their return might be in the future return on capital employed roce is thought of as a profitability ratio it compares net operating profit with capital employed and tells investors how much each dollar of earnings is generated with each dollar of capital employed some analysts prefer return on capital employed over return on equity and return on assets since it takes long term financing into consideration and is a better gauge for the performance or profitability of the company over a longer time period a higher return on capital employed suggests a more efficient company at least in terms of capital employment a higher number may also be indicative of a company with a lot of cash on hand since cash is included in total assets as a result high levels of cash can sometimes skew this metric one way to determine if a company has a good return on capital employed is to compare the company s roce with that of other companies in the same sector or industry the highest roce indicates the company with the best profitability among those being compared return on capital employed is calculated by dividing net operating profit or earnings before interest and taxes ebit by employed capital another way to calculate it is by dividing earnings before interest and taxes by the difference between total assets and current liabilities a company s roce can be compared with the returns from previous years a downward trend means the company s profitability levels are declining increasing roce means the company s profitability is increasing as well capital employed vs equitycapital employed and equity each play a different role in a company s capital structure equity is the amount of money that shareholders have invested in the company plus any retained earnings the primary difference between capital employed and equity lies in their composition and usage while equity focuses on the owner s investment and retained earnings capital employed encompasses both equity and long term debt this broader perspective provided by capital employed allows for a more comprehensive review of how a company is doing while equity is usually more concerned with ownership and the financial returns to shareholders capital employed gives better insight into the overall financial structure of a company in terms of financial analysis capital employed and equity serve different purposes capital employed is often used in ratios such as the roce formula we talked about above as mentioned in the last paragraph equity is factored into formulas like return on equity roe that track what value is generated for shareholders ultimately each is used in different ways to collectively provide a holistic view of a company s financial performance focusing on both operational efficiency and shareholder value capital employed in small vs large businessesthe concept of capital employed might be of bigger consequence when thinking about small businesses vs large businesses for small businesses capital employed often consists primarily of the owner s equity and a modest amount of debt large businesses usually have more complex capital structures involving a mix of significant equity and substantial long term debt the nature of capital employed is sometimes different between the two because of the nature of their operations small businesses typically have limited access to extensive credit facilities and rely more on personal investments small business loans or reinvested profits the focus for small businesses is often on maintaining liquidity and managing working capital efficiently to ensure that day to day operations can be sustained without financial strain meanwhile the large scale nature of large business operations often requires substantial investments in fixed assets such as property plant and equipment the management and optimization of capital employed may vary between small and large businesses small businesses typically prioritize agility and flexibility focusing on efficient working capital management to optimize cash flow this involves tight control over inventory accounts receivable and accounts payable and this is because it may have scarcer resources compared with a larger firm conversely large businesses can invest heavily in advanced technologies large scale projects and expansive infrastructure these types of businesses may also be able to secure financing at a much lower cost meaning it s able to collect and disburse capital at much greater scales limitations of capital employed metricsfirst the determination of capital employed involves various accounting estimates and judgments different accounting methods for valuing assets and liabilities such as historical cost vs fair value can lead to varying interpretations of capital employed this may affect the amount of capital employed by one company compared with the capital employed by another second capital employed calculations often do not capture the full complexity of a company s financial commitments and obligations for example lease liabilities off balance sheet arrangements and contingent liabilities may not always be pulled into the calculation these hidden obligations can significantly impact the financial health and risk profile of a business but may not be apparent in standard capital employed analyses the interpretation of capital employed can also be influenced by external economic factors and industry dynamics changes in interest rates inflation rates or specific industry market conditions can impact the value of assets and liabilities included in capital employed calculations for example fluctuations in property values or currency exchange rates can affect asset and liability balances at any given time it s not unusual for a company s financial records to be in flux and changing finally capital employed metrics may not account for intangible assets while tangible assets like property and equipment are typically included in capital employed calculations intangible assets such as patents brands and goodwill may not be accurately valued or captured this could severely understate the true value of a company as it may be generating asset value associated with but technically unrelated to the cash it is directly spending alternatives to capital employedthere are a couple of alternative metrics you can use to analyze financial performance aside from capital employed similar types of metrics may include example of how to use capital employedlet s calculate the historical return on capital employed by three tech companies alphabet inc apple inc and microsoft corp for the fiscal year ending in 2023 of the three companies apple inc has the highest return on capital employed of 183 9 a return on capital employed of 183 9 means that for every dollar invested in capital employed for 12 months ended sept 30 2023 the company made almost 2 in profits investors are interested in the ratio to see how efficiently a company uses its capital employed as well as its long term financing strategies 