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It can be used as an analytical tool to derive the helpfulness of assets used in the process production and the Capital Intensity Ratio.
It is the estimate used to measure how much a firm has invested from its total assets compared to how much the earnings are in revenue(like how is required to generate $1).
The ratio can be calculated by dividing the value of total assets in a specific period by the amount of revenue. As a result, 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 track 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 (or less) to generate more.
Firms invest huge cash into the production process that requires a good amount of backup in the form of fixed assets to generate revenue. It may decide to produce more units to meet the high cost and are considered capital intensive. One such example is the power generation firm.
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