Difference Between Capital Employed and Net Worth

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In the business world, many different financial metrics can be evaluated to determine the strength of a company. Two commonly used metrics are "capital employed" and "net worth." Although these numbers are closely related to the financial position of a company, they do not provide the same information.

Capital Employed

The term "capital employed" can mean one of several different things in the business world. It commonly indicates the amount of capital or assets a company uses to generate profits. To determine the capital employed, add the fixed assets to the current assets of the business. This gives you an idea of the total amount of assets a business has at any given time, which helps you determine what the company has going for it.

Net Worth

The net worth of a business gives you an idea of what the company is actually worth after liabilities are taken out. To calculate the net worth of a company, take the assets of the company and subtract the liabilities from that number. This result shows you the amount of equity the owners of a business have. It does not necessarily indicate the value of the company, but it does tell you what would be left if everything were liquidated.

Comparisons

By looking at the capital employed, you can get an incomplete picture of the financial strength of a company. The capital employed does not take into consideration what liabilities you have as a business. If a business has a large amount of debt, it could negatively impact the financial position of the company. Even if a company has a large amount of assets, it could still owe more than what those assets are worth.

Considerations

When evaluating a business, it is important to look at every angle financially. Do not simply look at the net worth or the capital employed. Although the net worth tells you how much equity the owners have accumulated up to this point, it could change based on the future plans of the business. By comparing the capital employed to the earnings of a company, you can determine how much capital it takes to generate a dollar of profits.

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