Capital intensive definition
/What is Capital Intensive?
An industry is capital intensive when a participant is required to invest heavily in fixed assets in order to compete with other established industry players. In a capital intensive environment, the fixed cost base of a business is quite high, so it must sell in high volume in order to earn sufficient funds to offset its costs. Another characteristic of this environment is that companies have a higher proportion of debt to equity, since they need debt funding to pay for their fixed asset acquisitions. When an industry is capital intensive, it is difficult for new players to enter the industry, so there tends to be a smaller number of competitors - perhaps to the point where the industry can be considered an oligopoly.
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Financial Characteristics of Capital Intensive
There are several characteristics associated with a business that is competing in a capital intensive marketplace. They are as follows:
High fixed cost base. A capital intensive business has a high fixed cost base, and so must generate a large amount of sales before it can turn a profit.
More price competition. A business with a high fixed cost base has a high breakeven point. A business in this situation is more likely to drop its prices in order to be assured of generating more sales.
Difficult to exit. It is more difficult for capital intensive businesses to exit an industry, because they must write off substantial fixed asset amounts. Instead, they tend to remain in the industry and accept low profits or losses for an extended period of time. When this is the case, overall profitability within the industry tends to be low.
Examples of Capital Intensive
Examples of such industries are oil exploration, oil refining, railways, airlines, and heavy equipment manufacturing.