IGCSE, A Level Business Student Forum

[KN] A limitation of using capital employed as a way to compare business size is that not every business spends a large amount of money on its assets
[AN] For example an airline may invest on new aeroplane whereas a different airline may use old aeroplane with the same amount of efficiency
[AN] Thus this leads to inefficient comparison as not all business are greater in size even if they invest more in there asset hence leading misguided information

[KN] Capital employed can be misleading
[APP] For instance a big business like Nike uses labor for the production of their shoes and use very few machinery.
[AN] Thus this shows that using capital employed to measure can make the business look small or big than it is which can lead to a businesses using wrong information regarding competitors resluting in bad decision making for the futuer projects.

[KN]Capital employed can be misleading as the business must've spent extra on expensive assets
[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.

kn:Capital employed measures the total value of a business’s assets and long-term investments, but it may not always give a fair comparison of size.
app:Some businesses may invest heavily in expensive equipment or high-end assets, while others may use cheaper or leased equipment to operate efficiently. For example, two companies could produce the same output, but one may appear larger simply because it owns more costly assets.
an:This shows that capital employed can exaggerate the size of firms that invest aggressively in expensive assets, and it may not accurately reflect operational efficiency or market reach.

{KN}Capital employed refers to the total value of a business’s assets used to generate profits. It is often used to measure the size of a business.
{APP}For example, an airline such as Emirates uses expensive aircraft and equipment, meaning its capital employed is very high. In contrast, a large online business like Netflix may have lower capital employed because it mainly relies on digital assets rather than physical equipment.
{AN}This shows that capital employed can be misleading when comparing businesses in different industries. Capital-intensive firms naturally appear larger even if their sales or profits are lower, so it may not give a fair comparison of overall business size.