What is the equation for capital employed?

The equation for capital employed is a fundamental concept in financial management that indicates the total amount of capital available for a business to utilize in its operations. The correct formulation is represented by adding equity and non-current liabilities.

When we consider capital employed, it reflects the long-term financing used in the business, which includes both the shareholders' equity and the long-term debt that is intended to finance the assets. Equity represents the owner's stake in the business, while non-current liabilities (also known as long-term liabilities) signify the obligations that are not expected to be settled within a year, such as loans and bonds.

This approach gives a comprehensive picture of the resources available to the company for its operational and investment activities. In contrast, other formulations do not capture the full essence of capital employed. For instance, total assets minus current liabilities provides a picture of net assets in the short term, but it does not account for how these assets are financed. Similarly, options that focus solely on current assets or liabilities do not reflect the broader financing structure and long-term investment potential of the business. By using the equation of equity plus non-current liabilities, you accurately measure the total capital employed in long-term financial strategies.