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It can be used as an analytical tool to derive the helpfulness of assets used in the process production and Capital Intensity Ratio.
It is the estimate used to measure how much a firm has invested from its total assets as compared to how much is the earnings, in the terms of, revenue(like how is required to generate $1).
The ratio can be calculated by dividing the value of total assets in a specific time period by the amount of revenue. It shows the reciprocal of the asset turnover ratio.
Like other financial ratio analysis reports, it is applied when you compare two companies in the same industry.
The analysis can be used to show how the firm is making use of its assets. This is significant as it helps to keep track of the relationship between revenue and assets.
The most common formula used to compute include both the long and short term asset categories, where you can divide the total (fixed and variable) from the revenues or the sales.
It can show how much one can spend more (or less) to generate more.
Firms invest huge cash money into the production process that requires a good amount of back up in the form of fixed assets to generate the revenue and it may decide to produce more units to meet the high cost and hence, are considered capital intensive. One such example is the power generation firm.
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