Capital employed

Obviously, the net annual profit must be clearly defined before comparisons are made with other companies. Similarly the term investment in Eq. (9-128) can have a variety of meanings. The two most common ones (used when assessing the profitability of companies as opposed to projects) are total assets and owners equity or capital employed. In the first case, Eq. (9-128) can be written as... 

At the enterprise level, the executive management responds to the voice of ownership and is primarily concerned with profit, return on capital employed, market share, etc. At the business level, the managers are concerned with products and services and hence respond to the voice of the customer. At the operational level, the middle managers, supervisors, operators, etc. focus on processes that produce products and services and hence respond to the voice of the processes carried out within their own function. 

Any presentation to the organization s senior management, besides giving the technical details, should include a financial appraisal, which could be on a simple payback basis. However, other methods are available, such as return on capital employed and discounted cash flow (DCF). 

Return on capital employed can be expressed in four ways ... 

Ratios well below 1 may indicate financial problems ahead while those substantially greater than 1 may point to poor credit control or under-utilization of cash. This ratio is sometimes known as the acid test . The principal profitability ratio in use is the net profit before interest and tax (NPBIT) to net assets or return on capital employed. 

The most widely used gage of profitability is the ratio of profit to net assets (or return on capital employed) ... 

The tanks for this reserve will form part of the capital equipment and the oil itself will need to be included when considering the capital employed. Where electricity is produced on site as a by-product in periods of low demand for steam, more cheaply than that obtained from the utility company, adjustments to the charges on a seasonal basis will be required. 

The EVA [10,11] combines information from the profit and loss statement (revenue, costs, earnings before interests and taxes (EBIT), etc.) and the financial sheet (net working capital (NWC), assets, etc.). The EVA is the interest calculation in absolute measurements and strongly related to the return on capital employed (ROCE) where the gained interest rate is calculated (Figure 1.7). In the long term, this interest rate should be above the capital costs of the company which is the interest rate the company has to pay for a credit on the capital market. Hence, a positive EVA means that the company has earned some money above the capital costs. 

Value-oriented management concepts evolved from cost and profit controlling towards value based management concepts. Transparency on profitability of invested capital for the company and its shareholders is an objective of value-based management. Profitability indicators are related to capital indicators. Common indicators are Return on Assets (ROA), Return on Capital Employed (ROCE) and Economic Value Added (EVA ) as presented in table 3 (Hostettler 2002 Revsine et al. 2004). 

R3 - Future inventory value planning inventory values are a crucial aspect in value planning on the one hand, inventory value leads to capital costs for the company. On the other hand, inventory value is capital employed influencing key value management indicators such as return on... 

Inventory indicators are of key interest for planners. Higher inventory on the one hand ensures delivery capability and hedges the risk of volatile procurement prices on the other hand, high inventories increase the capital employed and the capital costs. While transportation quantities are a result of distribution balances, inventory quantities can vary between minimum and maximum bandwidth boundaries. The relative inventory level IL1 measures the percentage of the total inventory ending quantity compared to the total absolute maximum bandwidth inventory. 

Using the formula C, + Vt + S], values can be calculated for each department. In Department 1, for example, the total value of output is 120 in Department 2, the total value is 60. In our previous analysis of Marx s reproduction schema, based on the second volume of Capital, it was assumed that these values are also the total prices of each department. However, in the third volume Marx focuses on the organic composition of capital, which measures the ratio (Ct/Vt) between constant and variable capital.2 These ratios vary between 4 and 0.4 in this example. And it is this variation that leads Marx to argue that values cannot be sustained as indicators of price for each department of production. The problem is that the rate of profit (.SVC, + V) for each department is calculated as a ratio between total surplus value and total capital. Yet, for each department its own mass of surplus value is calculated from the variable capital employed. 

The prices of medicines sold to the NHS are controlled in the United Kingdom by the PPRS, negotiated periodically every 5 to 6 years by the DoH with the Association of the British Pharmaceutical Industry (ABPI), for example in 1979, 1986, 1993 and 1999. The PPRS controls the maximum - but not guaranteed - profits that pharmaceutical companies make on the capital they have invested in plant for research, development and manufacturing for sales made to the NHS. (Capital employed by the individual companies... 

Each company with sales to the NHS of more than 1 million per annum has to supply financial information and those with sales of between 1 million and 25 million will have to supply full audited accounts. Companies with NHS sales greater than 25 million will have to submit a full annual financial return (APR). Products with NHS sales of greater than 100 000 and 500 000 will have to be specifically identified. These annual returns cover the overall sales to the NHS and the costs incurred, such as research and development expenditure, manufacturing costs, general administrative costs, promotional expenditure and capital employed. (Details of specific produce costs or sales are not required.)... 

Scheme members will now be able to include capital employed in their APR on the basis of its inclusion in UK statutory accounts, by injection or by imputation in the transfer price. This will enable some companies that have been assessed as return on sales (ROS) companies under the 1993 scheme to be assessed as ROC companies under this agreement. 

Alternatively, for scheme members whose APR home sales exceed their average assessed home capital employed (excluding any capital imputation from the transfer price) by a factor of 3.5 or more, a target rate of profit will be set by dividing the ROC target rate by a factor of 3.5. The assessment of the returns of scheme members who elect for the ROS option will take account of the MOT on transfer price profit. 

In his High Price of Bullion, Ricardo wrote, Gold and silver, like other commodities, have an intrinsic value, which is not arbitrary, but is dependent on their scarcity, the quantity of labor bestowed in procuring them, and the value of the capital employed in the mines which produce them (cited in Marcuzzo and Rosselli 42). This is somewhat different from the... 

The average return on net operating assets (RONOA) of the sample was 9%. The last two figures exemplify the capital intensity of custom manufacturing (CM)-biased fine-chemical companies. In order to achieve a good return of capital employed, a healthy margin is mandatory. A more standard... 

Working Capital (capital employed) is the money that has to be spent in order to start a new project or process, before any income from sales or product is received. This money is tied up, and therefore unavailable for other uses, in the form of current liabilities such as purchased raw materials and borrowings etc., less current assets such as unsold... 

Return on investment (ROl), Return on Capital Employed (ROCE) and Internal Rate of Return (IRR) are terms all referring to the profitability of a project or product in terms of the original investment made, i.e. ... 

Which areas, then, should be outsourced Efficiency gains and reduction of capital employed have to be balanced against higher transaction costs and a considerable risk of losing internal knowledge. Services that can be clearly specified and planned would typically be purchased externally if this allows a cost reduction. Detailed engineering is one example, while breakdown maintenance clearly would not fall into this group. 

So there must be other measures of value. The most obvious is gross sales volume the more a company sells in any market, the bigger it must be. This is generally true, but what may be more important for comparative purposes is what lies behind these sales are there enormous quantities of assets or capital required to achieve them, or is it a very lean company The ratio of gross sales to asset value or to capital employed will therefore be a better measure. 

Since companies exist primarily to provide income for their owners, i.e. to make a profit, their gross profit could be a more interesting figure than sales volume. The most profitable companies may be the best but, again, it is the ratio of profit to assets or capital employed that may be more important. 

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