What is a Capital Intensity Ratio?
What is a Capital Intensity Ratio?
The Capital Intensity Ratio (CIR) measures how much capital investment is required to generate a dollar of revenue. It is calculated as:
Key Insights:
- A higher CIR means the business requires significant capital investment to generate revenue (e.g., manufacturing, utilities, real estate).
- A lower CIR indicates a more asset-light business model, where revenue is generated with minimal capital investment (e.g., software, consulting).
Uses in Financial Analysis:
- Industry Comparisons: Helps compare capital efficiency across industries.
- Business Model Assessment: Useful for evaluating asset-heavy vs. asset-light models.
- Investment Decisions: Helps investors assess companies based on capital requirements and return on investment.
- Operational Efficiency: Indicates how effectively a company utilizes its assets.
Example: Capital Intensity Ratio for a Late-Stage PropTech Company
Let’s take for example a late-stage PropTech SaaS company with a SaaS-based model, operating with relatively low capital intensity compared to traditional real estate firms.
Assumptions:
- Total Assets (or Capital Expenditures in a given year) = $10 million
- This includes software development costs, cloud infrastructure, and office space.
- Annual Revenue = $50 million
Capital Intensity Ratio Calculation:
Interpretation:
- A CIR of 0.2 means the company requires $0.20 in assets or capital expenditure to generate $1 in revenue.
- This is relatively low, indicating an asset-light business model with high scalability.
- Compared to traditional real estate companies (which often have CIRs above 1.0 due to physical assets),efficiency is significantly higher.
Industry Comparison:
Key Takeaways:
- Scalability – Since the company does not require heavy capital expenditures, it can scale rapidly with minimal asset growth.
- Attractive to Investors – Asset-light SaaS models with low CIRs often receive higher valuations.
- Comparison with Competitors – If a competing IoT-based PropTech firm had a CIR of 1.0, it would indicate a more capital-intensive business model (due to hardware production and logistics).
