(FINANCIAL RATIO ANALYSIS). Do Internet research to calculate capital intensity
ID: 2815245 • Letter: #
Question
(FINANCIAL RATIO ANALYSIS). 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 point and one negative point about more capital intensive firms compared to less capital intensive firms. Do not exceed 1 page in your write-up(Times Roman, Font 12, double spaced).
In your paper, submit your numbers for both firms in 2017 on (i) Capital intensity ratio, (ii) Sales, and (iii) total assets.
Hint: Capital intensity ratio is the reciprocal of total asset turnover. Read the section under Total Asset Turnover.
Explanation / Answer
A high capital intensity ratio may due to lower utilization of the company's assets or it may be because the company's business is more capital intensive and less labor intensive (for example, because it is automated). Google has high Capital Intensive Ratio, (CIR) as the company’s average total assets increased more than that of the General Motors. Information Technology industry has more of automation than that of the General Motors. General Motors is more of labor intensive.
IT industry is less labor intensive. So more capital-intensive firms like Google have the below points:
Positive: Automation of products and services. Less labor is required, and as a consequence, profit margins are higher.
Negative: Capital is generally used in new projects to cope up with the ever changing technology and major percentage of capital goes into Research & development stages. Output is time-taking and result can be beneficially or not considered at all.
In contrast, less capital intensive firms (more labor intensive) like General Motors, Total assets usage for each new sales is lower compared to that of Google. Hence the lower CIR. Technology change is less frequent and capital once used to build Plant, machinery and equipment is used over years.
GM Google 2017 2016 2015 2017 2016 2015 Sales 145,588,000,000 149,184,000,000 135,725,000,000 110,855,000,000 90,272,000,000 74,989,000,000 Total Assets 212,482,000,000 221,690,000,000 194,338,000,000 197,295,000,000 167,497,000,000 147,461,000,000 Avg total assets 217,086,000,000 208,014,000,000 182,396,000,000 157,479,000,000 Capital intensity ratio 1.49 1.39 1.65 1.74Related Questions
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