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, buildings, 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.
- What is a capital intensive industry or company?
- Can companies choose their level of capital intensity?
- How do companies reduce their asset base?
- 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 Asset Structure.
- For more on the several meanings of capital in business, finance, and economics, see the article Capital.
- See the article Assets for more on the nature of capital and other assets.
- The article Capital Review Process explains how many firms budget and prioritize capital acquisitions.
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.
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 firm reduces the overall asset base while earnings remain constant or grow, the simple mathematics underlying profitability metrics result in better return on assets figures.
- If the firm sells assets such as buildings and uses an operating lease to replace them, the firm has new cash assets from the sale reinvest in other assets or other expenditures (such as research and development, or new service contracts) with an expected greater return.
- The purchase of assets and the leasing of assets typically have different tax consequences. One such tax difference results from reducing annual depreciation expenses by acquiring capital assets through operating lease rather than purchase. Lowering depreciation expense increases end-of-period profits but also brings increased tax liabilities on the income increase.
- 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 article