The capital intensity ratio is a financial ratio that measures the amount of capital required to generate a certain level of revenue or sales. It is calculated by dividing the total assets of a company by its annual sales revenue.
The capital intensity ratio reflects the degree to which a company relies on its assets to generate revenue. A higher capital intensity ratio indicates that a company requires more assets to generate a given level of sales, while a lower capital intensity ratio suggests that a company is more efficient in using its assets to generate revenue.
The formula for calculating the capital intensity ratio is as follows:
Capital Intensity Ratio = Total Assets / Sales Revenue
For example, if a company has total assets of $2 million and generates $5 million in annual sales revenue, its capital intensity ratio would be:
Capital Intensity Ratio = $2,000,000 / $5,000,000 Capital Intensity Ratio = 0.4
This means that the company requires $0.40 in assets to generate $1 in sales revenue.
The capital intensity ratio is important for investors and analysts because it can provide insights into a company’s operating efficiency and its ability to generate profits. Companies with high capital intensity ratios may face higher costs and greater financial risks, while companies with lower capital intensity ratios may have a competitive advantage in their industry.