What is a capital intensity ratio?

A

Capital intensity ratio is an indicator that determines the rate of fixed capital (fixed production assets) to net income, profit, or to the value of manufactured products.

Explanation:

Capital intensity shows the amount of capital of an enterprise, firm, which accounts for one unit of the annual volume of production in value terms. A product, that is, a good or service, for the production of which a relatively large amount of capital is required, might be considered as capital-intensive, and if less capital is needed, as capital-saving. Thus, this index may be one of the most crucial ones that show whether a company’s business policy is successful and appropriate or not. The formula of the indicator is as follows: “Capital intensity ratio equals total assets divided by sales” or capital expenditure divided by labor costs. A high capital intensity ratio for a firm indicates that it requires more assets than a corporation with the lower index. Then, a high coefficient may appear because of the inefficient using of the company’s assets. It should be mentioned that for firms in the same industry and implementing similar business policies, the firm that considers lower capital intensity as a requirement for growth rate is more likely to become successful.

To sum everything up, the indicator of capital intensity is essential for characterizing the pace of business development. This index can be used in a comparative assessment of various options for the development of industrial-territorial complexes and industries. Savings due to reasonable capital utilization resulting from implementing multiple new technologies in the production of critical products will contribute to increasing the economic efficiency of using the corresponding types of resources.

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Academic.Tips. 2020. "What is a capital intensity ratio?" April 2, 2020. https://academic.tips/question/what-is-a-capital-intensity-ratio/.

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