Guide to Analysing Companies

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CAPITAL
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clearly between different sorts of loans. These may reduce
but are unlikely to eliminate altogether the danger of banks
getting into trouble.
Capital allowance
The part of the amount paid for capital assets that can be set
off against income for the purposes of calculating a
company’s taxable profit. The demand for capital equipment
in a company can be controlled to some extent by governments’
fine-tuning of these allowances, both by the amount and by the
things that they can be set against. For example, allowances
might vary as to the period over which the capital expenditure
can be set off (say 20% a year for five years) or by the percent-
age that can be set off (say 60% in year one, but no more). The
degree to which capital allowances apply and how they are
used varies from country to country.
Capital asset pricing model
A model of the relationship between the expected risk of a se-
curity or investment portfolio and the return that in-
vestors can expect from it. The model is based on the theory
that investors will demand a premium for taking on increased
risk. The expected return from an asset or security is therefore
equal to the return derived from a risk-free security (such as a
government bond) plus a premium for the extra risk. Although
the model has limitations, particularly in assessing the likely
volatility of individual securities, it is still widely used as a
tool in managing portfolios of investments.
Capital employed
The capital in use in a business. There is no universally
agreed definition of what this includes, but it is usually taken to
mean net assets (that is, current assets plus fixed assets less