Posted in Operations and Supply Chain Terms, Total Reads: 1603
Definition: Capital Intensive
Capital Intensive means the industries that require heavy investment in purchasing, maintaining, and amortizing capital in course of its operations. Capital intensive industries require high volume of production and a high profit margin to provide good return on investment.
There are a number of examples of capital intensive industries like steel, cement, automotive, petroleum. These industries require large sum of money and capital to support their operations. Some businesses like IT, software design, banking, consulting etc. do not require much capital and money or resources to deliver output, hence are not capital intensive industries.
There is no exact mathematical definition of the calling an industry capital intensive or not, as a ballpark estimate analysts usually calculate the ratio between the labor cost and the capital expenses. The higher the ratio between capital expense and labor expense, the more capital intensive is the industry.
If a company is spending 3000 on equipment expenses and 1000 on labor expenses. Then probably the company is capital intensive. Capital intensive industries have high barriers to entry.