The balance sheet is a statement that highlights all the assets, liabilities and the capital of any company or organization.
It is more of a snapshot that explains all the capital resources that a business or a company utilizes at a particular time.
Many people often get confused that how should they calculate the total capital that is employed hence they need to perform or utilize the capital employed analysis.
In order to calculate accurate capital employed, people should focus on the funds that were used through the operating cycle and from where the company or business received those funds.
However, the important elements that need to be considered when it comes to studying or calculating the capital employed are to look at the fixed assets, inventories and trade receivables or payables of a particular company.
The thing that one should keep in mind is that the amount of capital that is employed is often financed by the total amount of capital that is invested.
In most cases, the people who are performing the capital employed analysis can identify or make senses of the future flexibility of the capital through the use of elements like net debt, liabilities, assets etc.
What is Capital Employed and how can it be calculated through a Company’s Balance Sheet?
However, what exactly capital employed analysis is, no one knows. There is no fixed definition that can explain the entire process of what it is, why it is used and what exactly it can determine.
Capital employed can be measured through a simple way and that can be done through the subtraction of the total assets of the company from the current liabilities.
Simple Method that can be used to calculate the Capital Employed
Under the simple method of analyzing the capital employed four different kinds of steps are involved. Here is a list of the steps that can be used to calculate the total capital employed:
The first step is to locate and identify the net value of all the assets that are fixed within a company. Companies have an option of either identifying the net value through using the original cost or they can simply use the replacement cost. Replacement cost is identified after depreciation has happened.
The next step is to make sure that all the capital investments that have happened in a particular business within a specific period of time should be added to the business.
Moreover, the cash in hand should be added as well along with the cash that is secured in the bank. Other monetary elements should also be added which includes bills that are receivable, stock and other types of assets that are current.
Lastly, after all the above elements have been added to the business the last step is to subtract all the current liabilities.
After the current liabilities are subtracted the company would get a figure that would highlight the capital that is employed within a particular company. All of the above factors are mentioned in the balance sheet and hence the financial department of the company just has to identify them and add them to find out the capital that is employed.