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Hello sir.
Is it true that capital employed is the equity which is the money borrowed from shareholders plus non-current liabilities which is the money borrowed from banks?
Secondly, please explain that capital employed is also called investment because it is done by investors?
If the question states that investment is being madr then it means that shareholders invest their money into our business.
It is true that capital employed is the equity plus the long-term debt.
As far as ‘investment’ is concerned, it depends on the context of the question but will normally refer to investment by the company into new projects.
Please explain these too. Thank you
(Q#1)
The money borrowed by shareholders is called equity which we have to return to the people in case of liquidation. Similarly, the money borrowed from financial institutions such as banks is called liabilities.(Q#2)
Another question is that: I have read in my textbook that ROCE shows how efficiently the company has used its assets to generate profits for the business.Could you please explain why the word assets are used instead of capital employed because it is the capital that generate profits according to ROCE formula (where the assets come from!?)
1. These are simply definitions. Equity is the money owing to shareholders, and long-term borrowings are non-current liabilities.
2. The net assets of the company are always equal to the capital employed.
These are both vary basic concepts from Paper FA (was Paper F3) and if needed I do suggest that you watch my free lectures for Paper FA.
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