Calculation of capital employed

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Monica (Querist)
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29 September 2013 while computing average capital employed for valuation purposes do we need to reduce miscellaneous expenditure from sundry assets or not.. what is the reason for reducing

Nikhil Kaushik

Nikhil Kaushik (Expert)
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29 September 2013 Miscellaneous expenditure constitute expenses already incurred which are yet to be written-off but have no impact or utility on the running of the business.

Therefore, they don't have any relation to the operations of the company. Including the same in capital employed would give a distorted picture of actual money tied up in running the business.

therefore the same is reduced to compute the capital employed.

CA Pallav Singhania

CA Pallav Singhania (Expert)
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29 September 2013 Agree with Kaushik ji,

Misc. Expenditure is to be reduced for the computation...

Gross capital employed = Fixed assets + Investments + Current assets

Net capital employed = Fixed assets + Investments + Working capital.

C A S.S.Agarwal, M.Com.,LL.B,

C A S.S.Agarwal, M.Com.,LL.B, (Expert)
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08 October 2013
Definition of 'Capital Employed'
1. The total amount of capital used for the acquisition of profits.

2. The value of all the assets employed in a business.

3. Fixed assets plus working capital.

4. Total assets less current liabilities.

Total capital harnessed in a firm's fixed and current assets. Viewed from the funding side, it equals stockholders' funds (equity capital) plus long-term liabilities (loan capital). Viewed from the asset side, it equals fixed assets plus working assets.

he capital employed calculation formula is as following:

Capital employed = Total assets - Current liabilities

or:

Capital employed = Non-current assets + Working capital.

Return on average capital employed is a useful ratio when analyzing businesses in capital-intensive industries, such as oil. Businesses that are able to squeeze higher profits from a smaller amount of capital assets will have a higher ROACE than businesses that are not as efficient in converting capital into profit.

Investors should be careful when using the ratio since capital assets, such as a refinery, can be depreciated over time. If the same amount of profit is made from an asset each period, the asset depreciating will make ROACE increase because it is less valuable. This makes it look as if the company is making good use of capital, though it is really not making any additional investments.

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