Capital Employed Formula

Capital Employed Formula

Capital employed formula has been shown below. The concept of capital employed has been explained with an example;

Capital Employed Formula = Equity + Long Term Debt

Capital Employed Formula Example

Equity of Company = 140,000

Long Term Debt     =   90,000

What is capital Employed?

Solution

Capital Employed = Equity + Long Term Debt

= 140,000 + 90,000

= 230,000 (Capital Employed)

Use of Capital Employed Calculation

Capital employed formula is widely used in calculation of return on capital employed. Formula for return on capital employed (ROCE) is given below

ROCE         =   Profit before Interest & Tax    .                               Capital Employed

Return on capital employed calculation shows company efficiency of using the resources for generating profit. There are number of advantage of calculating the return on capital employed i.e. investment appraisal, efficiency of resource utilization etc.

 Return on Capital Employed Example

Equity of Company = 140,000

Long Term Debt     =   90,000

Profit of company   =   35,000

What is capital Employed?

Solution

Capital Employed = Equity + Long Term Debt

= 140,000 + 90,000

= 230,000 (Capital Employed)

= 35,000/230,000

=15.21% (ROCE)