Capital intensive
Encyclopedia of Business Terms and Methods, ISBN 978-1- 929500-10-9. Copyright © 2012 by Marty J.Schmidt. Revised 29 January 2012.
The Meaning of Capital Intensive
A capital intensive industry, company, or product, is one whose major costs result from investments in equipment, machinery, or other expensive capital goods.
Mining, utilities, railroads, construction, and heavy manufacturing are capital intensive industries. Financial services and software development, for instance, are typically non capital intensive.
Many companies have some freedom to choose or at least modify their own level of capital intensity. For example, many companies choose to own buildings, vehicles, aircraft, and large computer systems, while other companies in the same industries choose to obtain the use of such assets through operating leases. .
Reducing the asset base by leasing assets can in some (but not all) cases improve the company's business performance in several ways:
- If the overall assets base is reduced while earnings remaing constant or grow, the simple mathematics underlying profitability metrics result in better return on assets figures.
- If assets such as buildings are sold (and replaced with leased facilities), cash assets acquired from the sale may be reinvested in other assets or other expenditures (such as research and development, or contracted services) with an expected greater return.
- The purchase of assets and the leasing of assets typically have different tax consequences.
- Leasing rather than purchasing assets may give the company more flexibility and freedom to upgrade or modernize assets frequently (such as computer systems, or vehicles).
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