Capital employed describes all of a company's assets once liabilities have been subtracted from the sum of all assets. Generally speaking, there are two kinds of assets that a company can consider as capital: fixed assets and current assets. Fixed assets refer to financial instruments, such as stocks, that cannot immediately be turned into real cash, while current assets describe cash, inventory products, and other items that can be turned into cash, usually within 12 months. Company performance is impacted by capital employed, and capital employed can be used to determine how well a company is performing.
Financial analysts and accountants who are interested in determining the performance of a company can use capital employed as an indicator. For example, if a manufacturing company continually purchases more and more equipment year after year, then it is possible that a company is fulfilling higher levels of demand since it is producing more. As demand increases, a company's inventory increases, often allowing that company to lower prices, which in turn can lead to more sales and greater profitability.
A company that is performing well often has access to more capital. For example, a company with good cash flow which is seen as profitable is worth more in the eyes of business valuation experts. This status is beneficial to organizations that seek lines of credit in order to purchase more capital, such as equipment and labor. Companies that perform poorly, on the other hand, often have difficulty receiving lines of credit since they might be in danger of leaving loans to go unpaid and even declaring bankruptcy. A result is that these companies tend to have less capital employed.
Executives and managers who are responsible for composing business plans and strategies use capital employed data to make decisions regarding expansion and risk. In order for a company to perform well, it often must continue to grow and keep up with new market trends. A company with a greater value of capital investments often can afford to take risks that a less successful company could not take.
Some financial experts believe that the connection between company performance and capital employed can be deceptive. For example, an analyst studying the capital value of a company is often looking at value that existed at one point in time. Asset values, especially fixed assets such as stocks and bonds, tend to rise and fall over time. Instead, some experts encourage analysts to observe whole periods in order to see what kind of real returns were generated from capital investments.