Capital Intensity Ratio

Capital intensity ratio of a company is a measure of the amount of capital needed per dollar of revenue. It is calculated by dividing total assets of a company by its sales. It is reciprocal of total asset turnover ratio.

A higher capital intensity ratio for a company means that the company needs more assets than a company with lower ratio to generate equal amount of sales. A high capital intensity ratio may due to lower utilization of the company's assets or it may be because the company's business is more capital intensive and less labor intensive (for example, because it is automated). However, for companies in the same industry and following similar business model and production processes, the company with lower capital intensity is better because it generates more revenue using less assets.

Formula

Capital Intensity Ratio =Total Assets
Sales
Capital Intensity Ratio =1
Total Assets Turnover Ratio

Example

Coca Cola Company (NYSE: KO) earned $46,542 million in financial year 2011-2012. Total assets at the end of the period were $79,974 million. PepsiCo's total asset turnover ratio for equivalent period was 0.94. Compare capital intensity of both the companies and conclude which one is more efficient using this single metric.

Solution

Coca Cola Company's capital intensity ratio
= Total Assets ÷ Sales
= $79,974M ÷ $46,542M
= 1.72

PepsiCo's capital intensity ratio
= 1 ÷ Asset Turnover
= 1 ÷ 0.94 = 1.06

PepsiCo seems to be using its assets more efficiently. It used only $1.06 dollars per $1 of revenue. Coca Cola Company on the other hand utilized $1.72 of assets to generate $1 of revenue.

Written by Obaidullah Jan