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 high 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 be 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 equals total assets divided by sales:
$$ \text{Capital Intensity Ratio}\ =\ \frac{\text{Total Assets}}{\text{Sales}} $$
Capital intensity ratio is the raciprocal of the total assets' turnover ratio:
$$ \text{Capital Intensity Ratio}\ =\ \frac{\text{1}}{\text{Total Assets’\ Turnover Ratio}} $$
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.
by Obaidullah Jan, ACA, CFA and last modified on