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Capital intensity ratio7/25/2023 ![]() ![]() $$CIR = \dfrac = 1.4$$ĬoladrinkCo used $1.40 of assets to generate $1 of revenue. If you know the asset turnover ratio, you can calculate capital intensity using the following formula instead: It entails adding both long term and short assets of the company, and then you divide by its total revenue, which is simply the sales. This is the most common formula companies use to compute their capital intensity ratio. Capital Intensity Ratio FormulaĬapital intensity ratio can be computed in two different ways. ![]() Since this ratio shows accurately how assets are used in income generation, companies can go a step further to utilize their findings to adjust where necessary for them to generate more revenues. High CIR indicates that the company has to spend too much on its assets to generate revenue, while a low CIR means that the company is spending less on its assets and is generating very high revenues. These companies need to produce in large volumes to receive a higher return in terms of revenue. An excellent example of such companies is power generation plants. Such businesses that require a large amount of money are known as capital intensive businesses. Simply put, capital intensity is an analytical tool used to gauge the effectiveness of assets in production.Ĭompanies invest large amounts of capital in their production process to expect a higher proportion of its fixed assets to generate revenues. and is reciprocal of the total asset turnover ratio (in math this means you can divide 1 by the number). It will show how well a company is generating revenues from its assets. It is a ratio analysis tool that companies often use to show how well the business is utilizing its assets. Capital intensity ratio (CIR) is a metric that shows you how much capital is needed to generate $1 of revenue. ![]()
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