Full Answer
What does capital intensity mean?
Capital intensity is the infusion of high amounts of capital in a business or production process. It therefore requires a higher proportion of fixed assets (land, property, plant, and equipment) to produce goods and services. Industries or companies that require such large capital investments are known as capital intensive businesses.
What is the difference between labor intensive and capital intensive?
• Capital intensive production requires more equipment and machinery to produce goods; therefore, require a larger financial investment. • Labor intensive refers to production that requires a higher labor input to carry out production activities in comparison to the amount of capital required.
What does capital intensive mean?
What Is Capital Intensive? The term "capital intensive" refers to business processes or industries that require large amounts of investment to produce a good or service and thus have a high percentage of fixed assets, such as property, plant, and equipment (PP&E).
What does the capital intensity ratio measure?
What Does the Capital Intensity Ratio Measure?
- Capital Intensity Ratio. The capital intensity ratio is a financial ratio. ...
- Example. One way to understand this concept is to walk through an example. ...
- Capital Intensive. When a company's capital intensity ratio is high, it is said to be capital intensive. ...
- Learn More. Financial ratios can be excellent measures for potential investors. ...
What does a high capital intensity mean?
What Is Capital Intensive? The term "capital intensive" refers to business processes or industries that require large amounts of investment to produce a good or service and thus have a high percentage of fixed assets, such as property, plant, and equipment (PP&E).
What is the meaning capital intensity?
Definition. The capital intensity measures, for a unit, the assets needed to generate income. It is calculated by dividing gross tangible fixed assets to full-time equivalent employeses .
What is a good capital intensity?
What Is A Good Capital Intensity Ratio? Whether or not a CIR is good or bad depends upon the industry a company is operating. Generally, a CIR of 1 or less than 1 is ideal, but again one must weigh the CIR in terms of the industry in which a company operates.
Should capital intensity be high or low?
Capital Intensity Ratio = 1 ÷ Asset Turnover Ratio While a higher figure is preferred for the total asset turnover, a lower figure is better for the capital intensity ratio since less capital spending is needed.
What does low capital intensity mean?
A low capital intensity ratio is an indication that the company is spending less on assets and is earning more revenue. Above all, the ratio depends on the type of the business and its operation; hence the interpretation might vary.
What happens when capital intensity increases?
Increased capital intensity can cause some workers to lose their jobs because they are no longer needed. This can lead to structural unemployment – at least in the short-term. However, more capital intensive industries create different kinds of jobs.
What does the capital intensity ratio tell us?
The capital intensity ratio reveals the amount of assets your business requires to generate $1 in sales. It equals total assets divided by annual sales. For this ratio, a smaller figure is better. The lower it is, the less capital you need to invest to run your business.
What causes increase in capital intensity?
It happens because labor becomes more expensive rather than capital and demand for labor becomes less than demand for capital. As a result, capital intensity would increase.
How can capital intensity be improved?
How to manage the investment process in a capital-intensive businessInvestments in safety and environmental stewardship. ... Repair of buildings and equipment. ... Information technology investments. ... Optional profit improvement projects. ... Expansion of current businesses and investment in new businesses.
What happens if working capital is too low?
Low Working Capital If a company's working capital ratio falls below one, it has a negative cash flow, meaning its current assets are less than its liabilities. The company cannot cover its debts with its current working capital. In this situation, a company is likely to have difficulty paying back its creditors.
What does the capital intensity ratio tell us?
The capital intensity ratio reveals the amount of assets your business requires to generate $1 in sales. It equals total assets divided by annual sales. For this ratio, a smaller figure is better. The lower it is, the less capital you need to invest to run your business.
What is capital intensity in process planning?
Capital intensity is the amount of fixed or real capital present in relation to other factors of production, especially labor. At the level of either a production process or the aggregate economy, it may be estimated by the capital to labor ratio, such as from the points along a capital/labor isoquant.
What is capital and labour intensity?
Capital intensive refers to the amount of capital invested so as to increase the revenue and profit whereas labour intensive refers to amount spent on training to labour so as to increase the efficiency of labour which will ultimately result in the increased production.
What causes increase in capital intensity?
It happens because labor becomes more expensive rather than capital and demand for labor becomes less than demand for capital. As a result, capital intensity would increase.
Why are capital-intensive industries more vulnerable to economic slowdowns than labor-intensive industries?
Their high operating leverage makes capital-intensive industries much more vulnerable to economic slowdowns compared with labor-intensive businesses because they still have to pay fixed costs, such as overhead on the plants that house the equipment and depreciation on the equipment.
Why do analysts use EBITDA?
Because capital-intensive industries have high depreciation costs, analysts that cover capital-intensive industries often add depreciation back to net income using a metric called earnings before interest, taxes, depreciation, and amortization (EBITDA). By using EBITDA, rather than net income, it is easier to compare the performance of companies in the same industry.
What is capital intensive industry?
Capital-intensive industries tend to have high levels of operating leverage, which is the ratio of fixed costs to variable costs. As a result, capital-intensive industries need a high volume of production to provide an adequate return on investment.
How to measure capital intensity?
Capital intensity can be measured by comparing capital and labor expenses. Capital-intensive firms usually have high depreciation costs and operating leverage. The capital intensity ratio is total assets divided by sales.
What does it mean when a company spends $100,000 on capital expenditures?
For example, if a company spends $100,000 on capital expenditures and $30,000 on labor, it is most likely capital-intensive. Likewise, if a company spends $300,000 on labor and only $10,000 on capital expenditures, it means the company is more service- or labor-oriented.
Who is Jake Frankenfield?
Jake Frankenfield is an experienced writer on a wide range of business news topics and his work has been featured on Investopedia and The New York Times among others. He has done extensive work and research on Facebook and data collection, Apple and user experience, blockchain and fintech, and cryptocurrency and the future of money.
Is capital leverage risky?
However, having both high operating leverage and financial leverage is very risky should sales fall unexpectedly.
What is capital intensive?
Capital Intensive refers to those industries or companies that require large upfront capital investments. Capital Investments Capital Investment refers to any investments made into the business with the objective of enhancing the operations.
What happens when a company goes to fire sale?
If the company goes to fire sale, the losses will be high. The fire sale is when the company requires money for working capital and sells off the assets. As the company sets itself for a fire sale, its assets lose value so fast that only 30-35% of it will be realized. The company cannot pivot easily.
How much is Facebook worth?
However, Facebook is worth over 400 billion USD. The reason is that Facebook is not a capital-intensive company. Its nature lies in the asset-light nature and the ability to grow the company.
Why did Facebook have multiple iterations?
Facebook had multiple iterations before it released its first version of the world. It is because all the incremental improvements were easy – because the project was not capital intensive. In capital-intensive projects, the risk of loss is low, but the quantum of possible losses is extremely high.
Is competition strong in capital?
The competition will be strong. We argued that capital heavy companies are safe from competition because of their high barriers. However, in case there is a competition, the competition will be quite strong —the example of Boeing Vs. Airbus is a great one. Until they both are the only players, they had market dominance and controlled the prices. However, when the Brazilian government helped the barrier in becoming one of the major airplane manufacturers by subsidizing them, it took a huge chunk of market share because of cheaper planes. It explains how, even though capital intensive companies are safe and the probability of competition is low, once competition comes in, the possible losses are high.
Is Ford a car company?
Ford, the car company, stayed as the leader of US automobiles for over 50 years. Even today, there only a few handfuls of automobile manufacturers in the USA. The same is with airplane manufacturing. Since airplane manufacturing is one of the most capital intensive, the ability for a normal person to go out and start a company on his own is almost zero. It ensures the incumbent players are safe and out of competition for everyone. The barriers to entry are high, and not everyone can get into the competition.
Is Netflix a CD based company?
Most companies experiment with the nature of their products. Netflix pivoted from a CD-based business to a streaming service in a matter of a year. Whereas GE, which is an extremely capital-intensive company, took over 15 years to change its direction.
What Is A Good Capital Intensity Ratio?
Whether or not a CIR is good or bad depends upon the industry a company is operating. Generally, a CIR of 1 or less than 1 is ideal, but again one must weigh the CIR in terms of the industry that a company operates in. For instance, a company operating in a service industry generally has a CIR of close to or below 1. In contrast, a manufacturing company would usually have a CIR of more than 1. Further, in capital-intensive industries like power plants, bridges, ports, hospitals and hotels the capital intensity ratio will always be more and maybe anywhere upwards of 2.
What does CIR mean?
A high capital intensity ratio (CIR) means a firm has made large investments in assets to generate revenue. Or, a company is witnessing lower utilization of the assets. A high ratio could also suggest that a firm is more capital intensive and less labor-intensive.
Why is CIR important?
Thus, it is crucial for managers to use this ratio to make intelligent production decisions related to assets.
How to get meaningful information from a company's CIR?
Thus, to get meaningful information from a company’s CIR, it is important that one takes into account the industry in which it operates, as well as compare with other companies, operating in the same industry. Also, when comparing, it is very important to compare the CIRs of two similar levels of companies. Otherwise, we will not get any meaningful information rather the decision could be wrong.
Why is ratio easy to calculate?
This ratio is easy to calculate because all the numbers that one needs for this ratio is easily available in the financial statements.
Why is capital intensity ratio important?
This is where the capital intensity ratio gains more importance because it takes into account both fixed and variable assets.
How to get CIR?
A simple formula to get CIR is to divide the total assets by sales.
Are we missing a good definition for Capital intensity? Don't keep it to yourself..
The ASL fingerspelling provided here is most commonly used for proper names of people and places; it is also used in some languages for concepts for which no sign is available at that moment.
Definitions & Translations
Get instant definitions for any word that hits you anywhere on the web!
What Is Capital Intensive?
- The term "capital intensive" refers to business processes or industries that require large amounts of investment to produce a good or service and thus have a high percentage of fixed assets, such as property, plant, and equipment (PP&E). Companies in capital-intensive industries are often marked by high levels of depreciation.
Understanding Capital Intensive
- Capital-intensive industries tend to have high levels of operating leverage, which is the ratio of fi…
Their high operating leverage makes capital-intensive industries much more vulnerable to economic slowdowns compared with labor-intensive businesses because they still have to pay fixed costs, such as overhead on the plants that house the equipment and depreciation on the e… - Examples of capital-intensive industries include automobile manufacturing, oil production, and r…
Capital intensity refers to the weight of a firm's assets—including plants, property, and equipment—in relation to other factors of production.
Measuring Capital Intensity
- Besides operating leverage, the capital intensity of a company can be gauged by calculating ho…
Another way to measure a firm's capital intensity is to compare capital expenses to labor expenses. For example, if a company spends $100,000 on capital expenditures and $30,000 on labor, it is most likely capital-intensive. Likewise, if a company spends $300,000 on labor and onl… - Capital intensity can be measured by comparing capital and labor expenses.
Capital-intensive firms usually have high depreciation costs and operating leverage.
The Impact of Capital Intensity on Earnings
- Capital-intensive firms generally use a lot of financial leverage, as they can use plant and equip…
Because capital-intensive industries have high depreciation costs, analysts that cover capital-intensive industries often add depreciation back to net income using a metric called earnings before interest, taxes, depreciation, and amortization (EBITDA). By using EBITDA, rather than ne…