Continued with Part 1 on the financial accounting ratio on gearing/borrowing/leverage level of a company, we should also review another financial ratio called Capital Employed. Capital employed essentially measured what the shareholders own plus all the long term liabilities. This is crucial as too much borrowing based on short term will be precarious to the company’s financial health.
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WHAT IS CAPITAL EMPLOYED? |
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Capital employed is basically the long term funds employed in a business.
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Capital employed of a business is from the ordinary shareholders and from long term liabilities. Hence, it is the effective amount of money actually being used in a business, regardless of whether it is from the owners or creditor or banks. |
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The long term liabilities includes the bank borrowings ( at least more than 12 months after balance sheet) or debenture holders which is of fixed duration and demands a fixed rate of interest |
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Another name for Capital Employed is NET WORTH |
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FORMULA FOR CAPITAL EMPLOYED OR NET WORTH |
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=Owners’ Equity + Long Term Liabilities
(Owners’ equity=ordinary share capital + plus =ordinary shareholders’ fund)
Since Capital employed = Net Worth
Net Worth = Total Assets less current liabilities
Net Worth = Net Assets |
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