CAPITAL EMPLOYED Meaning and
Definition
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Capital employed refers to the total amount of financial resources that a company or organization has used to operate and generate profits. It includes all the funds that have been invested in the business to purchase fixed assets, acquire inventory, and finance day-to-day operations.
In simpler terms, capital employed represents the total capital utilized by a company to carry out its activities effectively and efficiently. It encompasses both long-term and short-term investments made by the company.
The calculation of capital employed usually involves adding fixed assets, such as buildings, equipment, and machinery, to working capital. Working capital refers to the funds required for daily operations, such as raw materials, inventory, and accounts receivable minus accounts payable and other short-term liabilities. This measure provides an indication of how effectively a company is utilizing its resources to generate profits.
Capital employed is an essential metric in evaluating a company's financial health and performance because it shows the resources at the company's disposal to generate revenue and profitability. It allows comparison between companies operating in the same industry or sector and helps management make informed decisions regarding the allocation of resources and investment opportunities.
Investors and creditors often consider capital employed as a measure of the company's ability to generate returns on its investments, as it reflects the total amount of assets that have been put to productive use and can generate cash flows. Thus, understanding capital employed is crucial to assess the financial strength and growth potential of a company.
Etymology of CAPITAL EMPLOYED
The etymology of the phrase "capital employed" can be traced back to the Latin word "capitālis", which means "of the head" or "chief". It stems from the Latin word "caput", meaning "head". In ancient Rome, capital was often denoted by movable property, particularly livestock that was considered an individual's "head". Over time, the meaning of capital expanded to include financial assets or funds used in business ventures.
The word "employed" comes from the Latin verb "implicāre", which means "to entangle" or "to involve". In the context of capital, it refers to the use or utilization of funds or assets in economic activities.
Therefore, the phrase "capital employed" essentially conveys the idea of the financial resources or assets entangled or involved in business activities. It represents the total amount of money, equipment, and resources used to generate profits or income within an enterprise.
