What is Capital Intensive

What is Capital Intensive

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Capital Intensive referse to a corporate organization's capacity that is determined by how much money it has put into its fixed assets, such as machinery and other plant and equipment, in order to improve production, which leads to larger profits and solid returns on their investment.

To operate, any organisation needs money. The amount of capital used by the company to buy fixed assets is the basis for calculating how capital intensive a process is. It is described as the organization's ability to make fixed asset investments. Increased investment produces higher returns, which attracts new investors and expands the market share. Certain firms require more capital to launch in an area like the aviation company. Because capital-intensive business entities require more funding to maintain operations, their maintenance costs are also higher. Due to significant expenditures in machinery and fixed assets, these businesses have higher operating leverage, which raises operating costs. Sales volumes in Capital Intensive Sectors are often higher. These industries' competitiveness in the market is determined by the services they offer, the upkeep of their assets, labour productivity, risk factor, etc. Simply put, a company is said to be capital intensive if its capital expenditures are significantly higher than its labour costs.

Illustrations of Capital Intensive

There are many examples of sectors that require a lot of capital; a few of them are as follows:

a. Transportation industries like railroads, airlines, and canals require significant investment to purchase or provide the necessary transit medium. The volume of receipts is influenced by the level of services the organisation provides to its customers, who pay freight charges. The more operating expenses, such as labour, salaries, and administrative costs as well as repairs and maintenance, the lower the profit will be. The profit will be less. Due to increased depreciation costs, the profit also declines.

b. Business XYZ Inc. imported equipment from the US, which is predicted to increase sales by 50% and lower labour expenses because the equipment can manufacture the same things that 25 workers can currently make through the current procedure. The price of the machinery is Rs. 7,800,000, while the labour cost savings are thought to be Rs. 300,000. Eighty percent of the total assets are fixed assets, which include plant and equipment needed for business. The aforementioned business is the ideal illustration of a very capital-intensive sector.