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Hi Sir,
May I knw like to know net asset is equal to total assets- current liabilities OR total assets- total liabilities? because some people will say it is the first one but some people will say it is the second one so I got a bit confusedDoes capital employed is = net asset?
Thanks you sir
Net assets = total assets – total liabilities. In other words the equity in the company.
Capital employed = total assets – current liabilities. In other words, equity plus long term debt.
I find it easier to think of capital employed as equity + long term debt. In a question situation it’s often easier to find the equity and long term debt numbers and add them together, than to sum the total assets and then start subtracting all the current liabilities.
Also, there can be non-current liabilities which are not long-term debt so total assets minus current liabilities won’t always work.
I don’t understand what do u mean by there can be non current liabilities (ncl) which are not long term debt? is there any example of this kind of ncl?
Return on Capital Employed= PBIT/ Equity+ long term debt
so if that is the case we cannot find equity and long term debt, is that means we can use net asset (total asset-current liabilities)?capital employed is it equal to net asset?
because sometimes I heard ppl say net asset is total assets- current liabilities but I also heard ppl say net asset is total assets-total liabilities. so I get a bit confused.I don’t understand what do u mean by there can be non current liabilities (ncl) which are not long term debt? is there any example of this kind of ncl?.
Long term lease liabilities, is one example which could appear in F7. Certain types of long term provision such as environmental provisions could also appear in a question. These are non-current liabilities but are not debt in the true sense of the word and should not be treated as capital employed.
There are other examples such as defined benefit pension provisions, warranties and derivatives, which will not appear in F7 but could appear in P2.
Return on Capital Employed= PBIT/ Equity+ long term debt
so if that is the case we cannot find equity and long term debt, is that means we can use net asset (total asset-current liabilities)?You would use total asset – current liabilities yes. However this is not equal to net assets. Net assets = total assets – total liabilities.
capital employed is it equal to net asset?
because sometimes I heard ppl say net asset is total assets- current liabilities but I also heard ppl say net asset is total assets-total liabilities. so I get a bit confused.No, capital employed doesn’t equal net assets, unless the company has no long term debt. Those who say net assets is total assets – current liabilities are wrong.
Agree with everything Chris has said above.Just here to add that,one of the reasons return on capital employed is a useful measure, is that it allows easy comparability between companies.with different capital structures.For example, if a company in an industry is highly geared with one that has low levels of gearing.
This makes it a better measure in my opinion than return on equity which show better returns for highly indebted company than one primarily equity financed.I had the exact same confusion and I would like to add something to what he/she asked:
Asset turnover = Sales revenue/capital employed (net assets)
This was the way it had been written in the text book and it’s really difficult to understand whether they are referring to capital employed or net assets.
Does it mean the net assets would be equal to capital employed in the absence of non current liabilities, as you explained?
Don’t fully understand your question in the last paragraph. I think the most important thing here in terms of exams is to let exam question and scenario guide your approach. In absence of this, or if it is open or ambiguous, the following ACCA article (that I think you will find useful) suggests ratio should be revenue/(assets-current liabilities)-
Hope this helps.
Thank you for sharing the website. This is a part of the explanation given from there
“Revenue/Total assets – current liabilities
Asset turnover shows how efficiently management have utilised net assets to generate revenue. When looking at the components of the ratio, a change will be linked to either a movement in revenue, a movement in net assets, or both.”
Refer to the last statement above. They used the term “net assets” for total assets less CURRENT liabilities. While that is not what net assets is. Net assets would be total assets less TOTAL liabilities.
That is why I asked in the last paragraph if whether net assets=capital employed (owner’s capital but without non current liabilities)..
emvee16, I think I understand the point you are trying to make. In technical terms net assets is total assets – total liabilities. In term of this ratio, ACCA clearly want it to be calculated as revenue/total assets- current liabilities. My suggestion is that is what you should use in the exam unless explicitly or implicitly directed to do otherwise. In “real world” terms you may find different definitions and ratios including and excluding different aspects of what is considered capital employed. Other matters such as using average of capital employed or capital at end of year may also vary. To a large extent, the most important thing is consistency and justifiability of your approach.
So, for the asset turnover’s formula net assets meant total assets less CURRENT liabilities right? Is that the assumption we have to make according to that article, even if in practice net assets do not actually mean that way?
I would suggest that should be the default position in exam terms absent contrary indications in question. It’s often considered definition of capital employed in other ratios. I don’t want to confuse you but a number of different potential ratios on same theme could be presented in the exam. For instance net sales could be part of numerator instead of revenue. In ratio analysis questions and in “real world” scenarios, the important thing is to keep ratios consistent so that comparisons between organisations and or over time can be validly conducted.
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