accounts payable, accrued expenses) reduces free cash flows (FCFs). accounts receivable, inventories) and a decrease in an operating NWC liability (e.g. Why? An increase in an operating NWC asset (e.g. Negative Change in NWC → More Free Cash Flow (FCF).Positive Change in NWC → Less Free Cash Flow (FCF).Net working capital (NWC), the other type of reinvestment besides CapEx, determines the amount of cash tied up in day-to-day operations. property, plant & equipment (PP&E), while depreciation is the allocation of the expenditure across the useful life assumption of the fixed asset. Understanding Capital Intensity: Ratio AnalysisĬapital intensity is a key driver in corporate valuation because numerous variables are impacted, namely capital expenditures (Capex), depreciation, and net working capital (NWC).Ĭapex is the purchase of long-term fixed assets, i.e. requiring consistently high capital expenditures (Capex) as a percentage of revenue. If a company is described as “capital intensive,” its growth is implied to require substantial capital investments, whereas “non-capital-intensive” companies require less spending to create the same amount of revenue.Ĭommon examples of capital assets can be found below:Ĭompanies with significant fixed asset purchases are considered more capital intensive, i.e. how much capital is needed to generate $1.00 of revenue. How to Calculate the Capital Intensity Ratio (Step-by-Step)Ĭapital-intensive industries are characterized by substantial spending requirements on fixed assets relative to total revenue.Ĭapital intensity measures the amount of spending on assets necessary to support a certain level of revenue, i.e. The Capital Intensity Ratio describes a company’s level of reliance on asset purchases in order to sustain a certain level of growth.
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