Capital Employed: Definition and Importance Capital employed (also called funds employed) measures the total funds a company uses to generate profit. It reflects the capital invested in operating assets after short-term obligations are removed, giving insight into how effectively management uses resources to produce returns. Key takeaways:
Capital employed shows how much capital is put to work in the business.
It’s commonly used with profitability metrics—especially return on capital employed (ROCE).
* Two equivalent calculations: subtract current liabilities from total assets, or add noncurrent (long-term) liabilities to equity. Explore More Resources
How to Calculate Capital Employed Common formulas:
Capital employed = Total assets − Current liabilities
Capital employed = Equity + Noncurrent (long-term) liabilities Alternative composition:
* Capital employed ≈ Fixed assets + Working capital Explore More Resources
To calculate from a balance sheet:
1. Find total assets (including net fixed assets / PP&E and current assets).
2. Subtract current liabilities (accounts payable, short-term debt, dividends payable, etc.).
3. Or add shareholders’ equity to long-term liabilities. Return on Capital Employed (ROCE) ROCE measures profitability relative to capital employed and is useful for assessing long-term efficiency. Explore More Resources
Formula:
ROCE = Earnings Before Interest and Taxes (EBIT) / Capital employed Notes:
Higher ROCE indicates more efficient use of capital.
Compare ROCE with industry peers and historical company figures for meaningful insight.
ROACE (return on average capital employed) uses average assets and liabilities over a period: ROACE = EBIT / Average (Total assets − Current liabilities). Explore More Resources
Capital Employed vs. Equity
* Equity represents shareholder investment plus retained earnings.
* Capital employed includes equity plus long-term debt, giving a broader view of the capital structure.
* Use ROE to assess returns to shareholders; use ROCE to evaluate overall capital efficiency (including debt financing).
Small vs. Large Businesses
* Small businesses: capital employed often relies more on owner equity and short-term financing; emphasis on liquidity and working capital management.
* Large businesses: typically have complex capital structures with significant long-term debt and substantial fixed assets; greater scale for asset investment and potentially lower financing costs.
Limitations Be aware of these caveats:
Accounting choices (historical cost vs. fair value) affect asset and liability values.
Off-balance-sheet items, contingent liabilities, and lease obligations can be omitted.
Intangible assets (brands, patents, goodwill) may be poorly captured or excluded, understating true productive capital.
Macroeconomic factors (inflation, interest rates, currency moves) can distort comparisons across time or companies. Alternatives and Complementary Metrics Consider these measures alongside or instead of capital employed:
Return on assets (ROA) — net income / total assets
Return on equity (ROE) — net income / shareholders’ equity
Economic value added (EVA) — profit after deducting the cost of capital
Cash flow metrics (free cash flow, cash flow return on investment)
* Industry-specific operational metrics (inventory turnover, sales per square foot, etc.) Explore More Resources
Practical Example (Illustrative) If a company’s EBIT for the year is $200 million and capital employed is $1 billion:
ROCE = $200M / $1,000M = 20%
This means the company generated 20 cents of operating profit for each dollar of capital employed. How to Improve Capital Employed Efficiency Ways businesses can optimize capital employed:
Improve asset utilization and operational efficiency
Tighten working capital management (inventory, receivables, payables)
Refinance or restructure costly long-term debt
Prioritize investments with higher projected returns
Dispose of underperforming or noncore assets Explore More Resources
Frequently Asked Questions What is a “good” ROCE?
A higher ROCE is generally better, but “good” depends on industry norms and comparisons with peers or the company’s historical ROCE. How do you calculate capital employed from a balance sheet?
Sum net fixed assets and current assets, then subtract current liabilities. Or add shareholders’ equity and long-term liabilities. Explore More Resources
What is the difference between ROCE and ROACE?
ROACE uses average capital employed over a period to smooth seasonal or temporal fluctuations; ROCE uses capital employed at a point in time. Bottom Line Capital employed captures the funds a company uses in its operations by excluding short-term obligations from total assets or by combining equity with long-term liabilities. It’s most useful when paired with profitability metrics like ROCE to evaluate how efficiently a business converts invested capital into operating profit. Use it alongside other financial and industry-specific measures, and be mindful of accounting and off-balance-sheet factors when interpreting results. Explore More Resources