How is the Capital Intensity Ratio calculated?

The Capital Intensity Ratio is calculated by taking the reciprocal of the Total Asset Turnover ratio, which represents how efficiently a company utilizes its assets to generate sales. In formula terms, the Capital Intensity Ratio equals 1 divided by Total Asset Turnover.

This ratio indicates the amount of assets needed to support a level of sales. A higher Capital Intensity Ratio means a company requires more assets to generate each dollar of sales, which may signify more significant upfront investments in fixed or long-term assets, compared to a company with a lower ratio, which is more asset-efficient.

By understanding this relationship, companies and analysts can assess capital structure and investment efficiency more holistically. While the other options may refer to relevant financial metrics, they do not accurately capture the relationship defined by the Capital Intensity Ratio as established through the Total Asset Turnover formula.