Question

Do Internet research to calculate capital intensity ratio for General Motors company in 2017. Then do the same for Google company in 2017.

Then reflect on capital intensity ratio for both companies, and identify one positive and negative point about capital intensive firms.

In your paper, submit your numbers for both firms in 2017 on (i) Capital Intensity Ratio, (ii) Sales, and (iii) total assets. MAKE SURE TO SHOW YOUR AS TO HOW YOU GOT YOUR FIGURES.

Hint: Capital intensity ratio is the reciprocal of total asset turnover.

Answer 1

Answer:

Answer to (i):

As mentioned in the question: capital intensity ratio is the reciprocal of total asset turnover ratio.

Now:let us find the Total Asset Turnover Ratio for Google and General motors in 2017

Total Assets Turnover Ratio for Google in 2017= 0.5619

Total Assets Turnover Ratio for General Motors in 2017= 0.6852

So: as given in the question:Capital intensity Ratio is the reciprocal of the total asset turnover ratio

So: Capital Intensity Ratio for Google in 2017= 1/0.5619 ie. 1.78

So, Capital Intensity Ratio for General Motors in 2017= 1/0.6852 ie. 1.46

A high capital intensity ratio means that the company(in our case:Google) needs more assets to generate sales as compared to a lower capital intensity ratio company(in our case: General Motors) which requires lower assets to generate the same amount of sales.The high capital intensity ratio can be attributable to either lower utilization of the company's assets or the company is more capital -intensive (ie: automated) as compared to labour-intensive.In our case:the increase in capital intensity for Google is on account of it 's capital intensive nature as it tries to build more data centers to take advantage of the growing need for cloud storage.

Positive:Capital Intensive Firms have high operating and financial leverage which contributes to enormous profits in good times

Negative: Capital intensive Firms are highly cyclical in nature and can sustain huge losses during downturn(recession)

Answer to (II)

From Google's Income Statement of 2017:we see that the Total Revenue(sales) of Google in 2017 is $110.8 billions

From General Motors's Income Statement of 2017: we see that the Total Revenue(Sales) of General Motors in 2017 is: $ 145.588 Billions

Answer to (III):

From Google's Balance Sheet of 2017:we see that the Total Assets of Google in 2017 is $ 197.295 billions

From General Motor's Balance Sheet of 2017 we see that the Total Assets of General Motors is: $ 212.482 billions