What is a capital intensive industry or company?
A capital intensive industry or company, is one whose major costs result from investments in equipment, machinery, or other expensive capital assets. For capital intensive companies, asset structure is represented largely by assets such as land, buldings, plants, equipment, vehicles, or heavy equipment.
Mining, utilities, railroads, construction, and heavy manufacturing are typically capital intensive industries in this respect.
By contrast, companies in industries such as financial services and software development typically avoid investing heavily in such assets and are not regarded as capital intensive.
Can companies choose their level of capital intensity?
Many companies have some freedom to choose or at least modify their own level of capital intensity. Put in other terms, many companies have some freedom to choose or modify their capital structure and asset structure. 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.
How do companies reduce their asset base?
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 remain 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).
For a broader coverage
of asset structure (the relative sizes of asset categories in a
company's total asset base), and return on assets (ROA), see the
encyclopedia entry asset structure.