- June 21, 2020 at 3:32 pm
I don’t fully understand what capital employed actually is as there is a number of different formulas for calculating it and they are contradictory. For example,
Formula 1: Capital employed = Total assets – current liabilities
Formula 2: Capital employed = Equity + all interest-bearing liabilities (including overdraft)
Second formula includes overdraft in the capital employed figure, but first formula excludes it as part of current liabilities.
Also, second formula includes only interest bearing non-current labilities in capital employed while first formula takes total non-current liabilities.
Could you please clarify what capital employed actually is and why formulas used to calculate it are so contradictory?
Thank you.June 23, 2020 at 8:46 pm
Both formulae are correct as they are effectively using the accounting equation. The overdraft is correctly included in each as in the first we are starting with the total assets figure, whereas in the second we are starting with the equity figure.
To calculate it correctly then it depends on the information given in the question that can be used. If you’re given assets and liabilities then use the first formula, if not then you’ll have the information for the second formula instead.
You must be logged in to reply to this topic.