While there are several working definitions for capital employed, just about all of them include one basic element. Capital employed is involved in identifying the financial resources that are necessary for a corporation to continue functioning and engage in the important task of revenue generation. The type of financial resources that are considered to be part of these resources are somewhat limited, however, and do not include all the assets currently in the possession of the company.
Generally, capital employed is concerned with the value of capital investments rather than all the assets of the company. A capital investment would include any shares of stock or any bonds issued by the corporation. Arriving at an accurate figure in this scenario would also involve allowing for any current liabilities, specifically long term liabilities.
A slightly different view would take into consideration any current assets and current liabilities. With this formula, both fixed assets as well as current assets are taken into consideration. Current liabilities, including both short term and long term liabilities, would be subtracted from the overall value of the assets.
While the exact formula may vary slightly from one situation to another, the result usually is utilized for the same purpose. This figure is considered essential to determining the ROCE or return on capital employed. In simple, terms, understanding this number and comparing it to the amount of revenue generated from the efforts will help a company to determine two things. First, it's need to determine if the ratio between the two is sufficient to cover all expenses. Second, identifying the relationship between capital employed and the value of products sold can also help the company determine if a net profit was achieved.
Comparing the capital employed to the generated revenue for a given period can often yield information about the overall performance of the company. By having a clear picture of the end result of the efforts, it is possible to begin assessing how assets are being used and determine how to make better use of them in order to increase profitability.
