Definition:
A capital-intensity ratio is a financial metric that measures the amount of capital required to generate a unit of revenue. It reflects the relationship between a company’s capital investment and its output.
Formula:
Capital-Intensity Ratio = Fixed Assets / Revenue
Key points about capital-intensity ratio:
- Capital investment: The capital-intensity ratio compares a company’s fixed assets to its revenue.
- Asset efficiency: A higher capital-intensity ratio indicates that a company requires more capital investment to generate each unit of revenue, which may suggest less efficient use of assets.
- Industry comparison: Capital-intensity ratios can be compared across industries to assess the relative capital intensity of different sectors.
- Investment decisions: Investors may use capital-intensity ratios to evaluate the efficiency of a company’s capital investment.
Why is capital-intensity ratio important?
- Efficiency: A high capital-intensity ratio may suggest that a company is using its assets inefficiently, while a low ratio may indicate efficient use of assets.
- Investment decisions: Investors may use capital-intensity ratios to evaluate the efficiency of a company’s capital investment.
- Industry comparison: Capital-intensity ratios can be compared across industries to assess the relative capital intensity of different sectors.
In essence, the capital-intensity ratio is a financial metric that measures the amount of capital required to generate a unit of revenue, and it’s a useful tool for assessing a company’s asset efficiency and comparing it to other companies in the same industry.
