05 Explain limitation of using capital employed to compare business size.

[Sir Afzal Shad]

05 Explain limitation of using capital employed to compare business size. [3]
Hint: What about the 'aggressiveness' of the business towards buying high end assets?

[M huzaifa jillani]

(KN)
Capital employed measures the total value of a business's assets used to generate profits but it may not always show the true size of a business.
(APP)
For example a technology company might have low capital employed because it mainly uses software and digital tools while an airline requires expensive aircraft and equipment.
(AN)
Therefore using only capital employed to compare business size can be misleading a business with high capital employed is not necessarily more successful or larger in terms of output, sales or market share.
MODERATOR COMMENT:
KN:0/1
APP:1/1
AN:1/1

[Fatima ibtehaj]

[KN]A business with high capital employed is not always larger or more successful than one with less.
[APP]For instance, a tech company like Microsoft may use less capital than an airline like Qatar Airways but still have far greater profits and market value.
[AN]This shows that capital employed only measures how much has been invested, not how efficiently the money is used or how much output or revenue it produces. Therefore, it’s best to use capital employed alongside other measures (like sales or profit) for a more accurate comparison of business size.
MODERATOR COMMENT:
KN:1/1
APP:1/1
AN:0/1

[Abdullah Baig]

Kn
Using capital employed to compare business size can be misleading because some businesses invest more heavily in expensive assets than others
App
For example, one airline might buy brand new aircraft and modern equipment while another of similar size may use cheaper facilities making the first appear larger just because it invests more aggressively even though both generate similar revenue and serve a similar number of customers
An
Therefore, capital employed doesn’t always reflect true business scale, as differences in investment style and asset choices can distort comparisons
MODERATOR COMMENT:
KN:1/1
APP:1/1
AN:0/1

[Abdullah Altaf]

[KN] The business which is more labour intensive will have wrong information.
[APP] For example, a restaurant requires many employees but not much capital in equipment, while a factory needs a lot of capital in machinery but fewer employees.
[AN] Therefore, using capital employed alone to determine business size can be misleading, resulting in wrong business plan for future and also hard to measure cash flow forecast.
MODERATOR COMMENT:
KN:1/1
APP:1/1
AN:1/1

[Aarib Saad]

(KN)Certain businesses are more labor intensive than capital intensive.
(APP)For instance, most shoe manufacturers and even Nike, the biggest shoe manufacturer use labor for the production of their shoes and very little machinery.
(AN)Thus, only using capital employed to measure business can lead to a misleading result for such businesses, making the business seem smaller or larger than it is, which can lead to a businesses using wrong information regarding competitors so business plan and decisions such as pricing will be flawed, which will worsen competitivity.
MODERATOR COMMENT:
KN:1/1
APP:1/1
AN:1/1

[shamaim shakeel]

A limit of using capital employed to compare business size is that it only shows how much money a business has put into assets, not how well it uses them. (Knowledge)
For example, Qatar Airways may spend a lot on very expensive planes, while another airline buys cheaper ones but still carries many passengers. (Application)
This is because some businesses like to buy high end assets to look modern this makes their capital employed seem higher so it can give a wrong idea of which business is truly bigger or more successful. Analysis
MODERATOR COMMENT:
KN:1/1
APP:1/1
AN:0/1

[Muaz Aamir]

KN:
Capital employed means the total money a business has invested from owners and long-term loans.

AP:
For example, a supermarket like Tesco needs more capital for buildings, delivery trucks, and equipment compared to a software company, which mainly needs computers and skilled workers.

AN:
This makes it hard to compare business size because companies in different industries use very different amounts of capital. Asset values can also change, making some businesses look smaller or bigger than they really are. Plus, some firms use their capital more efficiently, so a business with less capital employed might still perform better.
MODERATOR COMMENT:
KN:0/1
APP:1/1
AN:0/1

[EmmanWaseem]

The size being compared of Capital employed doesn't always mean it is going well
They may not have accurate results meaning that even if the business is large they may use tools that would usually be done in a smaller size capital employed business
This means that it may be due to other factors which will determine the size
MODERATOR COMMENT:
KN:1.1
APP:0/1
AN:0/1

[Uqbah hadeed kayani]

[kn] Using capital employed to compare business size can be unreliable because asset values vary between industries.
[app] For example, an airline needs expensive aircraft, while a software company relies mainly on skilled workers and computers.
[an] This makes comparisons inaccurate, as high capital doesn’t always mean higher profits or efficiency, and it ignores non-financial factors like brand strength.
MODERATOR COMMENT:
KN:1/1
APP:1/1
AN:0/1

[Abdullah Mohsin]

[KN] A limitation of using capital employed is that a business may be less aggressive towards buying high end assets.
[APP] For example, a budget airline may choose to lease aircrafts instead of purchasing expensive new planes, so its capital employed looks smaller compared to a luxury airline, even though both serve a similar number of passengers.
[AN] This makes comparisons inaccurate, as an airline with higher agressiveness towards purchasing planes would look larger than a airline that leases its aircrafts, misleading investors to invest in larger airlines e.g Delta airlines.
MODERATOR COMMENT:
KN:1/1
APP:1/1
AN:0/1

[Shuraim Arif]

(KN) It shows the amount of capital employed into the business rather than the true size.
(APP) For example, a tech company may invest a lot less in capital compared to an airline that buys huge expensive aircraft and airport lounges, but the tech company may be more profitable than the airline.
(AN) This means that capital employed may form a false image of the business when figuring out its size and comparing with other businesses. Analyzing financial statements, on the other hand, would be a far more accurate way of knowing the size of a business and comparing with others.
MODERATOR COMMENT:
KN:0/1
APP:1/1
AN:0/1

[Abdur Rehman khan]

[KN] A limitation of using capital employed is that it can be misleading if a business invests heavily in expensive assets.
[APP] For example, one company might buy high-end machinery while another buys cheaper but equally productive equipment.
[AN] This makes the first business appear larger even though both produce the same output giving an inaccurate picture of true business performance which can mislead comparisons or decisions and can mislead investors and policymakers.
MODERATOR COMMENT:
KN:1/1
APP:1/1
AN:1/1

[Naveen fatima]

[KN]Capital employed means the total amount of money and assets used in a business.
[APP]For example, an airline might have a lot of capital because aircrafts etc costs alot.
[AN]This is a weak way to compare size because some businesses need expensive equipment even if they are not very big. It also doesn’t show how well the money is being used. Prices of assets can change over time, so the capital value might not be accurate when comparing businesses.
MODERATOR COMMENT:
KN:0/1
APP:1/1
AN:1/1

[hassanalizafar]

[KN] Measuring business size through capital employed is not always reliable as the amount invested in assets doesn’t always reflect the true scale of operations.
[APP] For instance, a small luxury hotel may purchase premium furniture and technology giving it a high capital value compared to a much larger budget hotel.
[AN] This can create a distorted view of business size as high spending doesn’t always mean higher production capacity hence smaller firms may appear larger on paper comparisons with lowcost firms become unfair which leads to investors misjudging the firms efficiency hence lead to poor financial decisions.
MODERATOR COMMENT:
KN:1/1
APP:1/1
AN:1/1