Capital Employed

Capital Employed

Capital Employed

The expression 'Capital Employed' often used in the Press, chairman's statement, etc., refers to Share capital plus reserves, which is represented by the net total assets after deducting the external liabilities. The total assets are the fixed assets and the current assets. The external liabilities are loan capital and current liabilities, The excess of total assets other external liabilities is what the any is worth. If the figure for preference shares is also deducted as a liability, the residue is what the ordinary share-holders own. This:

Fixed assets £

Current assets

Total assets

Len

Loan capital

Current liabilities

Preference shares

What ordinary shareholders own

If the residue, namely the amount owned by the ordinary shareholders, is divided by the number of ordinary shares, the result is the 'net asset backing' or the 'asset value per share, if you want to know what you are really paying for a share in these assets, compare the 'asset value with the 'market value. This 'asset value', however, can be very often understated because fixed assets (e.g., property) may be undervalued.

The working capital of a company is the company's re-sources immediately available for conducting the business; it consists of the excess of current assets over current liabilities i.e., net current assets. This working capital is not entirely in cash. In assessing the financial position of a company, as far as its ability to carry out its undertakings unhampered is concerned, its liquidity (amount of cash and quickly realisable securities) as well as bank borrowing facilities available must be taken into account The successful conduct of a business requires adequate cash resources. On the other hand excess liquid assets may indicate cash not sufficiently profitably employed.

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