Question

What are the similarities of Total asset turn over and capital intensity. What does a high and low value indicate? why are these important equations

Answer 1

Every business in order to operate successfully requires that it uses it's assets efficiently.

The total asset turnover ratio and the capital intensity ratio depicts how well a company is using its assets to generate sales.

Total asset turnover = sales/ total assets

This ratio depicts how well a company is using its assets to generate higher level of sales.

For example, of the sales is $1,00,000 and the total assets is $20,000. The total asset turnover is "

= $1,00,000/$20,000

= 5 times

A high value indicates that the business is using its assets very efficiently to generate sales. the higher the ratio, the better it is for the business.

The capital intensity ratio = assets / sales

This ratio if the smaller the better for the business. The less capital a business must require in order to generate sales. Using the numbers from the above example, the capital intensity ratio will be

= 20,000/ 1,00,000

= 0.2

Your business needs an investment of 20 cents in assets for every dollar in sales.

The lower the ratio, the better as the business will require less investment in capital in order to generate higher level of sales and run the business.

A high asset turnover and a lower capital intensity ratio in comparison to peers provides a business competitive edge and helps investors make the decision to invest in these companies easy.