What Is Capital Employed?

Capital employed, also known as funds employed, is the total amount of capital used for the acquisition of profits by a firm or project. Capital employed can also refer to the value of all the assets used by a company to generate earnings. By employing capital, companies invest in the long-term future of the company. Capital employed is helpful since it's used with other financial metrics to determine the return on a company's assets as well as how effective management is at employing capital.

Formula and Calculation of Capital Employed

 $\begin{aligned} \text{Capital employed} &= \text{Total assets} - \text{Current liabilities} \\ &=\text{Equity} + \text{Noncurrent liabilities} \end{aligned}$Capital employed​=Total assets−Current liabilities​

Capital employed is calculated by taking total assets from the balance sheet and subtracting current liabilities, which are short-term financial obligations.

Capital employed can be calculated by adding fixed assets to working capital, or by adding equity—found in shareholders' equity section of the balance sheet—to non-current liabilities, meaning long-term liabilities.

What Capital Employed Can Tell You

Capital employed can give a snapshot of how a company is investing its money. However, it is a frequently used term that is at the same time very difficult to define because there are so many contexts in which it can be used. All definitions generally refer to the capital investment necessary for a business to function.

Capital investments include stocks and long-term liabilities. It also refers to the value of assets used in the operation of a business. In other words, it is a measure of the value of assets minus current liabilities. Both of these measures can be found on the balance sheet. A current liability is the portion of debt that must be paid back within one year. In this way, capital employed is a more accurate estimate of total assets.

Capital employed is better interpreted by combining it with other information to form an analysis metric such as return on capital employed (ROCE).

Return on Capital Employed (ROCE)

Capital employed is primarily used by analysts to determine the return on capital employed (ROCE). Like return on assets (ROA), investors use ROCE to get an approximation of what their return might be in the future. Return on capital employed (ROCE) is thought of as a profitability ratio. It compares net operating profit to capital employed and tells investors how much each dollar of earnings is generated with each dollar of capital employed.

Some analysts prefer return on capital employed over return on equity and return on assets since it takes long-term financing into consideration, and is a better gauge for the performance or profitability of the company over a longer period of time.

A higher return on capital employed suggests a more efficient company, at least in terms of capital employment. A higher number may also be indicative of a company with a lot of cash on hand since cash is included in total assets. As a result, high levels of cash can sometimes skew this metric. Return on capital employed is calculated by dividing net operating profit, or earnings before interest and taxes (EBIT), by employed capital. Another way to calculate it is by dividing earnings before interest and taxes by the difference between total assets and current liabilities. A company's ROCE can be compared to the returns from previous years. A downward trend means the company's profitability levels are declining. Increasing ROCE means the company's profitability is increasing as well.

Example of How to Use Capital Employed

Let's calculate the historical return on capital employed by three tech companies—Alphabet Inc., Apple Inc., and Microsoft Corporation—for the fiscal year ending in 2021.

(in $millions)	Alphabet	Apple	Microsoft
EBIT	$41,047	$65,339	$69,916
Total Assets (TA)	$319,616	$323,888	$333,779
Current Liabilities (CL)	$56,834	$105,392	$88,657
TA - CL	$262,782	$218,496	$245,122
Return on Capital Employed	0.1562	0.2990	0.2852

Of the three companies, Apple Inc. has the highest return on capital employed of 29.9%. A return on capital employed of 29.9% means that for every dollar invested in capital employed for 12 months ended September 30, 2021, the company made almost 30 cents in profits. Investors are interested in the ratio to see how efficiently a company uses its capital employed as well as its long-term financing strategies.

The Bottom Line

Capital employed, or funds employed, is the total amount of capital that a company uses in capital investments to generate profits. Capital investments include stocks and long-term liabilities, as well as the value of the assets that are used in operations. Because of this, capital employed can provide a snapshot of how effectively the company is using its money. Capital employed is calculated by subtracting current liabilities from total assets (total assets are the net value of all fixed assets plus all capital investments and current assets). You can also find capital employed by adding noncurrent liabilities to owners' equity. Analysts used capital employed to calculate return on capital employed (ROCE). This shows the return on a company's investment. A higher ROCE indicates a more efficient company with more successful capital investments.