What is capital intensity?

The intensity of capital is a measure of efficiency in terms of how much money the company must spend to make money. Companies with high capital intensity do not work very efficiently and may not have a strong market position. Lower intensity indicates a higher return on investment. Some industries are naturally more intense than others to support infrastructure they require to work. For the purposes of this calculation, the assets, structure, work and other costs incurred by the company for the production of products and services. If the capital intensity is greater than one, it means that society spends more than it brings. Ritings less than one suggest that the company generates the return on its investment. The size of the return may vary.

Some reasons why companies could have high capital intensity, expensive equipment and a large number of workers. Companies that need large, complicated machines to produce products will have to spend moreso that they can produce, even if it can match it in the long term, because the initial investment of the company in assets is spread over many years. The work -intensive industry also requires a lot of capital, because the company must pay workers in addition to paying taxes, buying insurance and solving other costs associated with employees. These expenses can increase the investment needed to create revenues.

different measures can be used to reduce capital intensity and streamline the company. Companies may try to reduce the cost of making production, for example, or by reorganizing the management structures. Employees themselves may have recommendations. Companies can also take a long strategic position and invest large amounts of one year -round of assets that will be paid for themselves over time. A temporary decline in profits may be an acceptable compromise for possible benefits.

Companies can for the purposes of internal refeRent and research to use capital intensity calculations. They can observe not only performance as a whole, but also individual departments. Division within the company can be more or less effective. Findings that do not contribute to the bottom line can allow companies to restructify, select some products or change the procedures within the department to make it effective again. These calculations can also be discussed in the annual reports where managers can explain the decision to shareholders and other investors.