Question

A decrease in a firm's capital intensity ratio implies an increase in how efficiently it uses its assets to generate sales.

Select one:

True

False

Answer 1

Ans: True

Capital Intensity Ratio = (Total Assets)/Sales

Thus lower capital intensity ratio implies that a company needs lesser assets as compared to another company with higher capital intensity ratio, to generate same amount of sales. If we compare 2 companies within same industry (line of business), then we can say lower capital intensity ratio will imply better utilization of assets (more revenues generated using lesser assets). However we must also consider that certain businesses in specific industry may be more capital intesive resulting into higher Capital intensity Ratio.