3/16/2023 0 Comments Intensity equation![]() ![]() Suppose that a company has $1 million in revenue during Year 1. Capital Intensity Ratio Calculation Example The formula for calculating the capital intensity ratio consists of dividing the average total assets of a company by its revenue in the corresponding period. Simply put, the capital intensity ratio is the amount of spending required per dollar of revenue generated. One method to gauge a company’s capital intensity is called the “capital intensity ratio.” On the other hand, a decrease in an operating NWC asset and an increase in an operating NWC liability causes free cash flows (FCFs) to rise. accounts payable, accrued expenses) reduces free cash flows (FCFs). accounts receivable, inventories) and a decrease in an operating NWC liability (e.g. Why? An increase in an operating NWC asset (e.g. Negative Change in NWC → More Free Cash Flow (FCF).Positive Change in NWC → Less Free Cash Flow (FCF).Net working capital (NWC), the other type of reinvestment besides CapEx, determines the amount of cash tied up in day-to-day operations. property, plant & equipment (PP&E), while depreciation is the allocation of the expenditure across the useful life assumption of the fixed asset. What is Capital Intensity? How to Interpret the Capital Intensity RatioĬapital intensity is a key driver in corporate valuation because numerous variables are impacted, namely capital expenditures (Capex), depreciation, and net working capital (NWC).Ĭapex is the purchase of long-term fixed assets, i.e. ![]() requiring consistently high capital expenditures (Capex) as a percentage of revenue. If a company is described as “capital intensive,” its growth is implied to require substantial capital investments, whereas “non-capital-intensive” companies require less spending to create the same amount of revenue.Ĭommon examples of capital assets can be found below:Ĭompanies with significant fixed asset purchases are considered more capital intensive, i.e. how much capital is needed to generate $1.00 of revenue. How to Calculate the Capital Intensity RatioĬapital-intensive industries are characterized by substantial spending requirements on fixed assets relative to total revenue.Ĭapital intensity measures the amount of spending on assets necessary to support a certain level of revenue, i.e.
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