Capital employed is basically the effective capital that is being used in the business. The average of the capital account for the year i.e. (opening capital + closing capital) ÷ 2 may be used as capital employed. Most people start a business with the hope to make satisfactory returns on their capital employed. The formula for capital employed is:
This shows that effective use of capital is very crucial to the success of a business. Company A has made a return of 30% net profit on its capital. Company B has only made a return of 10% net profit on its capital although it has three times the value of capital.