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Capital Employed

 

Capital employed is a value of capital investments in a company. Basically, the capital of each company can be classified in these types of capital:

  • Equity capital 
  • Debt capital
  • Working capital

 

And only two kinds of those have cost of capital: equity capital and debt capital while working capital has no cost because it does not have to pay interest or dividends. Employed capital is the kind of capital that requires some return. Debt capital pays interest for debt providers while equity capital pays dividends (or appreciate in value) for shareholders. So, both these kinds of capital are employed and together represent ‘capital employed’. 

 

‘Capital employed’ mostly is used in some financial ratios as ‘return on capital employed’ or other financial calculations. 

 

Capital employed formula


(1) Capital employed = Total assets – Current liabilities


(2) Capital employed = Total assets – Non-financial liabilities


(3) Capital employed = Shareholders’ equity + Financial liabilities


(4) Capital employed = Fixed assets + Adjusted working capital

 

* As you can see, there are many modifications of formulas that are used to calculate employed capital. The first (1) formula is the most popular but also is very rough. Second (2) and (3) formulas are the most accurate and should give the same result if calculated correctly. All the data for capital can be found in company’s balance sheet.

 

 






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