![]() The formula can is as below:Ĭapital Intensity Ratio = Total Assets / Net Revenues The capital intensity ratio of a business can be calculated using the capital intensity ratio formula. How to Calculate Capital Intensity Ratio? In contrast, businesses that require lower investments to generate more revenues are preferred by investors. Usually, businesses with a high capital intensity ratio are riskier investments because they require a higher amount of investment for lower returns. The ratio can also be used by investors to determine the risks of their investment in a business. READ: Return on Net Assets Ratio: Definition, Formula, and How to Calculate Two factors cause a lower capital intensity ratio, either a low amount of assets or capital invested in a business or high revenue generated by the business. This is because a lower ratio means that the business is efficiently utilizing its assets to generate revenue. The lower the capital intensity ratio of business is, the better it is considered. The main purpose of calculating the capital intensity ratio of a business is to determine its efficiency in utilizing its assets to generate revenues. Purpose of Calculating Capital Intensity Ratio For example, a law firm can operate with very minimal investment but still operate efficiently and effectively. These businesses require a small amount of investment upfront and can even operate in the absence of capital assets. These are also known as labour-intensive businesses. In contrast, services-based businesses are the opposite of capital intensive businesses. For example, Samsung’s production processes can be described as capital-intensive because it requires a lot of machinery and other assets to operate. When economists describe a production process as capital-intensive, they mean that the production process within a business needs a large amount of investment or capital assets. Apart from industries or specific businesses, particular business processes can also be termed as capital-intensive for example, the production process. If these businesses do not meet the asset requirements, they cannot operate at all or at least not efficiently. These are all industries or businesses that require a large amount of upfront investment to get started. Examples of businesses operating in a capital intensive industry include large manufacturing companies, oil refining or exploration companies, electrical power generation companies, etc. What are Capital Intensive Businesses?Ĭapital intensive businesses are those businesses that heavily rely on assets to generate revenues. It is a ratio that a business can use to demonstrate how efficiently it is utilizing its assets in the generation of revenues. In simpler terms, it is the measure of how much assets a business uses to generate $1 in revenues. What is Capital Intensity Ratio?Ĭapital intensity ratio is a measure of the total amount of capital assets needed to generate revenue. Therefore, it is vital to understand what is capital intensity ratio. The ratio can be very beneficial for businesses and investors. The capital intensity of a business can be determined using the capital intensity ratio of a business. In the absence of fixed assets, these businesses cannot operate.īusinesses that rely on a high amount of fixed assets or investments are known as capital intensive businesses. For instance, a freight company will mainly depend on different vehicles to complete their operations. On the other hand, some other businesses may only rely on fixed assets to generate income. This applies to businesses in the services industry, where a high amount of fixed assets is not necessary for operations. ![]() For example, some of these structures may not require a lot of assets to complete their operations. ![]() Fixed assets are different from inventory or stock, which are the assets that businesses sell to generate revenue and are short-term.ĭifferent businesses will have their own unique fixed asset structures. Examples of fixed assets include building which businesses use for operations, vehicles used to transport goods, machines used for production, etc. Fixed assets are also defined as assets that business use for more than a single accounting period and are not for sale in ordinary conditions. They use fixed assets in their operations to generate wealth in the long-term. Fixed assets, often referred to as property, plant and equipment, are an essential part of any business, especially businesses in the manufacturing industry. ![]()
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