What is the return on employed capital?

The return on the capital used, also called the year, is a corporate financial formula that determines the efficiency and profitability of capital investments. Capital investments often represent the purchase or acquisition of the main assets used in business operations. Buildings, production facilities, equipment or other fixed assets are usually purchased by financing banks. In order to determine how well the company used its capital to carry out these investments, companies use this calculation of formulas to compare this percentage with the interest rate on bank loans used to invest in capital. The formula consists of three parts: revenues before income in taxes (EBIT), total assets and current obligations. EBIT is calculated by accepting sales sales of less operating costs and adding back any non -repairing income generated by the company. Operation Expensses usually include the cost of sold goods, the cost of selling goods and general or administrative expenditure used to generate PREntrepreneurs for business. Depreciation and various expenses are also included in the company's operating costs.

The return on the denominator of the employed capital represents the total assets owned by minus the current obligations. Total assets include current and long -term assets listed in the balance sheet. Current assets usually include cash, tradable securities, supplies and receivables. Long -term assets usually include any property, plant and equipment owned by companies for the production of consumer goods or services. Current obligations are any money owed by the company, payable in less than 12 months. These obligations often include payable accounts, short -term debt, business loan or short -term bonds due.

Most Companies want a high percentage of return on capital used in investing in capital. For example, if the company has 2.25 million USD in the US (USD) in EBIT, total assets of $ 14.5 million and current obligations of $ 7.8 million, the company will have 33.5% of a year. This formula would be prepared as follows: $ 2.25 million divided USD ($ 14.5 million less than $ 7.8 million).

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Formula error is that it uses the historical accounting value of long -term assets when calculating corporate finances. Historical costs representing the accounting value of long -term assets may change depending on the type of asset and whether or not uncrowned or depreciated according to traditional accounting rules. Incorrect assets of assets may excessively or insufficiently inflate the return on the capital used formula.