Capital Intensity

Capital intensity is often measured as total assets divided by revenue, or sometimes as capital expenditure divided by revenue. A higher figure means the business needs more assets to produce its sales.

For example, a company with total assets of 8,000,000 and revenue of 4,000,000 has a capital intensity of 2. It needs 2 of assets for each 1 of annual revenue.

Capital-intensive industries include utilities, telecoms, airlines, steel, oil and gas and semiconductor manufacturing. Less capital-intensive businesses include software, consulting and many online services.

Capital intensity affects risk and returns. Capital-intensive businesses usually have high fixed costs and high operating leverage, so profits are sensitive to demand. They need large ongoing investment to maintain and grow, which reduces free cash flow. However, high capital needs also create barriers to entry, protecting established companies from new competitors.