A company's balance sheet offers a snapshot of how a company utilizes its capital resources at a given point in time. To perform a capital-employed analysis, focus on funds being used during the operating cycle and from where those funds come. The most important items to identify are fixed assets, inventories, trade receivables and payables.
Capital Employed Analysis
Capital employed is a catch-all phrase. No fixed or universal definitions explain what capital employed means – or, rather, different definitions are based on different contexts.
Fundamental investors most frequently refer to capital employed as part of the return on capital employed (ROCE) or return on average capital employed (ROACE) metrics. ROCE and ROACE compare the company's profitability to the total investments made in new capital.
Return On Capital Employed - ROCE
The simple method of determining capital employed by looking at a balance sheet involves four steps:
• Add all capital investments into the business.
• Add cash in hand, cash at bank, bills receivable, stock and other current assets.
• Subtract current liabilities.
Check out the answer to our FAQ - What does a high capital employed imply about risk?