Capital Employed and Long Term Debt Overview

Study Notes

Capital Employed refers to all of the assets and liabilities used by a business in its operations. This figure includes both fixed assets like property, plant, and equipment, as well as current assets such as inventory, accounts receivable, etc., but excludes current liabilities like accounts payable. It is also known as Total Net Working Assets and reflects the total investment made by the company in its own resources. A key component of capital employed is Long Term Debt, which consists primarily of bonds and mortgages issued with maturities longer than one year.

Long Term Debt is money borrowed from lenders, usually banks, that will have to be repaid sometime in the future—with interest payments made along the way—and typically has a maturity period of more than five years. Interest rates on loans secured by real estate can vary depending upon the perceived riskiness of the loan and the state of the economy at the time it was made. In most cases, when companies borrow money from lending institutions through bond issues, they must pledge some of their assets as collateral. One common example of this type of security is a mortgage. When a company borrows funds, it becomes legally obligated to make regular interest payments throughout the life of the bond until the final payment of principal is due at the end of the stated maturity of the bond. If the borrower fails to make these periodic interest or principal payments, the bondholder can foreclose on any property used as collateral against the bond.

These types of debts do not represent cash on hand; rather, each represents a commitment for future cash outflows. As such, corporations are required to report them on financial statements so investors know how much they owe and have insight into potential risks associated with holding the securities. For instance, if a corporation's stocks are worth less than what it owes to creditors, the stockholders could lose everything. Therefore, having good information about corporate finances can help guide people toward wisely managed businesses where there is little chance of losing money.

In summary, Capital Employed encompasses all the assets and liabilities utilized by a business, including Long Term Debt, which is an important part of managing a firm's overall investments and commitments. Understanding how a company manages this aspect of its financing can offer valuable insights into whether it might face challenges meeting obligations down the road or may be a wise bet for those seeking stable returns over the long haul.

Description

Explore the concept of Capital Employed and Long Term Debt in this quiz. Learn about the assets, liabilities, long term obligations, and financial risks associated with these components of a company's finances.