Article

Capital Employed
June 07 , 2012

Capital employed is the value of all the assets employed in a business, including equity and preference share capital, fixed and current assets, and gross borrowings plus current assets and less current liabilities. It is essentially the sum of a company's fixed assets and its working capital (i.e. operating working capital and non-operating working capital). It is therefore equal to the sum of the net amounts devoted by a business to the operating cycle and investment cycle. Also known as operating assets. Capital employed is financed by two main types of funds, shareholders' equity and net debt, sometimes regrouped under the heading of invested capital.

Return on Capital Employed (ROCE) is a measuring tool that measures the efficiency and profitability of capital investments undertaken by a corporation. A firm acquires capital assets such as trucks, computers, etc to help makes its business operations more efficient, cut down on costs and realize greater profits or acquire more market share.

Return on Capital Employed ratio also indicates whether the company is earning sufficient revenues and profits in order to make the best use of its capital assets. It is expressed in the form of a percentage, and the higher the percentage, the better.

The formula for calculating ROCE is EBIT/(Total assets - Current liabilities).

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