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In capital emolyed formula, Net assets or Capital emplyoed = Net worth + Debt. In such that, net worth means only Equity share holders fund. Right? My doubt is While speaking about capital employed why they didn't speak about preference shares?
Answers (7)
Capital employed can be computed either by subtracting current liabilities from total assets or by adding net worth and longterm debt Here net worth can be arrived by subtracting total liabilities from total assets, which means networth includes equity and preference capital.. so networth means the total capital available
syama r
Capital employed can be computed either by subtracting current liabilities from total assets or by adding net worth and longterm debt Here net worth can be arrived by subtracting total liabilities from total assets, which means networth includes equity and preference capital.. so networth means the total capital available
But in our material they mentioned Net worth menas only Equity shareholders fund. That's why I'm asking why they omitted preference share capital while calculating Capital Employed?
Thread Starter
Manoj RajBut in our material they mentioned Net worth menas only Equity shareholders fund. That's why I'm asking why they omitted preference share capital while calculating Capital Employed?
Can you please show the portion in material with the formula for computing capital employed
Thread Starter
Manoj RajLook at that underlined lines
Here the question is about return on equity so we consider only equity share capital while computing networth.
Return on Capital can be computed from 3 points of view: (a) Equity Shareholders point of view: Here you will only consider the capital that belongs to Equity shareholders. (b) All the shareholders point of view: Here you will consider both the equity shareholders funds and preference capital (c) Long term Funds point of view: Here you will consider Equity funds, Preference Capital as well as Long term debt. All in All the game is on the user of financial statement. If you are an Equity Shareholder, you'll need first rate of return. If you are preference shareholder, the second rate of return will be more relevant. If you are a debenture holder or bank the last rate is more relevant
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