Fundamental Analysis — Corporate Finance — Investing

Capital Intensity: The Key to Unlock Profits in Heavy Industries?

6 min readJan 11, 2023

Behind every successful business in a heavy industry, there’s a careful calculation of capital intensity. Learn the secrets to getting this powerful tool right and better investing in industrial stocks !

Subject of the day came to me while writing a deep dive analysis about Air Liquide for This is a very interesting subject that I have therefore decided to explore further here with you: capital intensity.

Let’s start by defining what an asset is. In financial terms, an asset is something you own that has value (cash, building, brand, etc.).

A distinction is made between non-current or fixed assets (long-term, such as buildings, equipment, vehicles, etc.) and current or circulating assets (cash, marketable securities or debts from customers that should be sold or turned into cash in the current year).

Assets are also distinguished as being tangible (such as money, real estate or equipment), or intangible (such as patents, trademarks or copyrights).

This may seem obvious, but to exist, a company generally needs tangible assets to operate, even if some companies rely more and more on intangible assets. We also talk about the rise of capitalism without capital, a subject covered in more detail in the book “Capitalism without capital: The rise of the immaterial economy. Very good reading!

Industrial stocks like Air Liquide, for example, need a lot of tangible and fixed assets. That makes sense: an industry needs production units, storage areas, logistics equipment, complex machinery, etc. We even sometimes speak of the term “heavy industry” for activities requiring the use of very large assets in order to exist.

The material, the equipment, the buildings: everything is paid for! And without them, no revenue!

In a capitalistic economy, having assets means to buy or build them first. And to do so requires capital, either from debt or equity (themselves coming from shareholders or retained earnings). This is where capital intensity comes in!

Capital intensity (CI) measures the amount of capital required to invest in assets and obtain a given turnover. Note that it can also be used to finance working capital, but I will limit myself to assets to keep things simple.

The CI can be determined in different ways. Personally, I add the physical assets to the working capital needs, then I divide by the total revenue or sales. You may notice that it is basically the inverse of the asset turnover rate.

Heavy industry stocks, such as Air Liquide, BASF, ArcelorMittal and Tesla, form a whole group of capital-intensive companies, with high CI. This means that they need a lot of capital to buy machinery, equipment, buildings, etc., to produce and sell their products or services. Other industries have a lower CI and don’t need the same amount of capital to operate (e.g. IT services like Adobe). It is also sometimes referred to as an “asset light” model when a company relies on outsourcing, franchising or other forms of partnership to operate its business, rather than owning and maintaining many assets physical. Typically fast food like McDonald’s.

Semiconductor industry is a highly capital intensive world

Let’s look at semiconductor foundries and Taiwan SemiConductor Manufacturing Company (NYSE:TSM). Truth be told, few industries are more capital intensive than chip manufacturing because of the high cost of producing the highly complex, intricate components and the significant amount of capital needed to invest in the necessary advanced technology and equipment. It requires a large upfront investment, as well as ongoing maintenance and upgrades to stay competitive. Additionally, chip manufacturing has long lead times, meaning that companies must have the capital to cover their costs for up to several months before receiving their returns on investment.

During the last quarterly reports conference call, TSMC financial director Wendell Huang spoke of the need to have a variable IC according to CAPEX, those investment expenditures in fixed tangible assets that add value over the long term:

Let me try to answer this question from the capital intensity point of view. When we invest heavily to capture the future growth, the capital intensity will be high like last year and this year. But if the growth slows down, the capital intensity may become lower. Now longer term wise, we think that a normal reasonable capital intensity may be somewhere between mid to high 30 percentages longer-term-wise.

We also observe very well this concept of variable capital intensity at TSMC over time:

All this to say that to operate and generate income, an industrial company needs physical assets, and to have these physical assets, it will need capital. It will then be necessary to be vigilant regarding the company’s efficiency to manage this capital and assets.

Let’s say you want to start your ice cream business. If I lend you or invest money in your business to buy your van, machine, raw materials, etc. (the assets), I would prefer my capital to be used to create something profitable! It makes sense, but the ultimate goal is to be profitable. If your business fails to use its assets effectively to generate profits, it risks not being profitable and incurring losses. And I’m going to moderately appreciate it, because that means you’re not going to be able to reimburse me or pay me dividends properly !

Let’s recap capital flows and close the loop:

I will therefore pay attention to the return on capital employed (ROCE). A company that manages to use its capital efficiently to generate profits will have a high ROCE. It will be able to achieve high profit margins and generate significant returns for its shareholders, as well as repay its creditors and cover the costs of its capital investment.

TSMC ROCE history (source)

In a capital-intensive industry, it is therefore particularly important to follow the ROCE. A good rule of thumb is that a ROCE of 15% or more reflects a good quality business.

In conclusion, I hope you have understood the importance of capital intensity, especially when coupled with ROCE. When investing, even more in industrial stocks, it is essential to have the right tools to assess whether companies are profitable and their efficiency in the use of assets. I hope this story will help you!

I’m Raphaël, founder and editor-in-chief of, a financial website for French-speaking private investors. Thanks for reading! Don’t hesitate to follow me on Medium, Twitter or Polywork.

This article is for educational and entertainment purposes only and shouldn’t be considered as financial or legal advice. Not all information will be accurate, but all the data is sourced. Consult a professional before making any significant financial decisions. This article shouldn’t be seen as an incentive to buy or sell any of the securities mentioned therein, nor endorsement to any presented strategy. I own long position on Air Liquide (EPA:AI), Tesla (NASDAQ:TSLA) and Adobe (NASDAQ:ADBE). Some links can be affiliated ones.




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