The companies that consistently have the largest capital expenditures are naturally those in capital-intensive industries. One way of measuring capital intensity is physical capital per worker. For example, automobile production requires a substantial amount of expensive equipment for each worker.
That makes automobile manufacturing a capital-intensive industry with large capital expenditures. The operations of capital-intensive businesses require investments in high-priced items, such as facilities, infrastructure, and major manufacturing equipment. Energy, transportation, and semiconductors are also traditionally near the top of the list.
- Capital expenditures are major purchases, such as facilities and equipment, that companies make to maintain or expand their operations.
- The companies that consistently have the largest capital expenditures are naturally those in capital-intensive industries.
- Automobile manufacturing, energy, transportation, and semiconductors are all industries with large capital expenditures.
- Companies gradually recover the cost of capital expenditure acquisitions by depreciating the assets over time.
Before going further, it helps to clarify what is meant by capital expenditures. Capital expenditures are major investments, such as facilities and equipment, that companies make to maintain or expand their operations. Because such purchases involve acquiring assets that provide value and usefulness for several years, companies gradually recover the cost of these acquisitions by depreciating the assets over time.
Ordinarily, businesses are not allowed to deduct the full costs of capital expenditures in the year the expenses are incurred. Therefore, the substantial outlays of capital required for such purchases must be carefully planned out, usually years in advance.
As of January 2022, the auto industry has capital expenditures of $43.9 billion in comparison to advertising, which has capital expenditures of $582 million.
That way, companies can avoid overextending themselves financially and creating cash flow problems. For capital-intensive companies, proper management of capital expenditures is crucial for survival and growth. Effective management requires striking the right balance between the need for resources in the future and the ability to generate profits in the present.
Many business expenses do not qualify as capital expenditures. Most obviously, any money spent on employee salaries and hourly pay is labor rather than a capital expenditure. Human capital spending, such as employee training, also does not qualify as a capital expenditure. In general, capital expenditures leave something of value behind for the company.
The energy industry is one of the most capital-intensive and requires large capital expenditures. Energy companies can be subdivided into companies that produce energy and those that supply it. Oil, gas, and coal firms are among the most well-known producers.
These companies explore, retrieve, and refine energy sources. On the other hand, power companies deliver energy to businesses and individuals. Power companies are sometimes considered part of a separate utility sector instead, particularly if they are heavily regulated.
In any case, both parts of the energy sector must regularly make substantial capital investments. Oil and gas producers must purchase the equipment required for retrieving and refining natural resources. Similarly, power companies have to invest in the massive infrastructure necessary to deliver energy.
The transportation sector also has consistently high capital expenditures. It includes airlines, railroads, and trucking. Airlines must eventually replace their fleets of aircraft, railroad companies need new locomotives, and trucking firms must buy trucks from time to time; however, there is a definite order to the capital intensity in the transportation sector.
Even an older commercial airliner can easily cost a few million depending on the type, which far outweighs the crew's salaries. A new semi-truck is more likely to cost between $70,000 to $160,000, which is still more capital per worker than in most businesses.
Semiconductor manufacturing also demands substantial capital expenditures. Some of Intel's new processor factories require multibillion-dollar investments in equipment and manufacturing facilities.
Furthermore, these facilities must be replaced or extensively upgraded after a few years to keep pace with technological changes. Although other semiconductors are generally less expensive to produce than Intel's latest processors, the upgrade cycle keeps capital expenditures high.
What Are Examples of Capital Expenditure?
Capital expenditure is the money that a company spends on acquiring an asset needed to operate its business. Capital expenditures also include the money spent on sustaining these assets. Common capital expenditures include property, plant, and equipment, such as machines, trucks, factories, office furniture, computers, computer software, and warehouses.
What Is an Example of a Capital Intensive Industry?
Capital-intensive industries include automotive, airline, oil and gas, mining, manufacturing, and real estate. These companies all have to spend money on assets that are expensive, such as a factory or an airplane.
Is Amazon Capital Intensive?
Yes, Amazon is a capital-intensive industry. It owns warehouses and trucks to store, package, and deliver orders. It also has many offices that require furniture, computers, and computer software.
The Bottom Line
Capital expenditure is the money that companies spend on assets that are required to run their business. Businesses that have to spend money on more expensive items or many items are capital-intensive businesses. Companies that operate in the energy, transportation, and semiconductor industries are some of the most capital intensive given the various assets they need to buy and the high cost of those assets.