Financial Management

25Capital Management and Cash Flow: Long-Term Capital Assets

In Chapter 24, we described capital efficiency as a key value driver and explored operating capital in detail. This chapter will examine the remaining components of capital effectiveness, including property, plant, and equipment, and intangible assets. Figure 25.1 drills down into the components of capital investment and asset management.

CAPITAL INTENSITY

The term capital intensity is used to describe the level of property, plant, and equipment (PP&E; also known as fixed assets) that is required to support a business. Capital intensity will vary significantly from firm to firm, from industry to industry, and from one business model to another. Key among the drivers of capital intensity are the nature of the industry, the effectiveness of capital processes, and the degree of vertical integration.

Nature of Industry Certain industries, such as automotive manufacturing, refining, and transportation require high levels of capital assets. Others, such as consulting, require very little in the way of capital assets. Other industries fall somewhere in the middle of these two extremes.

FIGURE 25.1 Drill-down: Capital effectiveness and asset management.

Effectiveness of Capital Process  Companies that require substantial investments in capital assets must develop effective decision and control processes ...