Capital IntensityCapEx/Rev

What is CapEx to Revenue?

CapEx to Revenue measures how much of each sales dollar the company reinvests into property, plant, and equipment. Low-CapEx businesses (software, asset-light services) convert revenue into free cash flow with little reinvestment burden, while high-CapEx businesses (telecom, utilities, semiconductors) must reinvest aggressively just to maintain competitive position.

Formula

CapEx to Revenue = Capital Expenditures / Revenue

Why Capital Intensity Matters

Compare Visa (CapEx/Rev around 2%) to Verizon (CapEx/Rev around 15%). Visa keeps the bulk of its revenue as free cash flow available for buybacks and dividends; Verizon must reinvest heavily just to maintain its network. Over a 10-year horizon, this difference in capital intensity is one of the biggest determinants of shareholder returns.

That said, high CapEx is not inherently bad if it earns returns above the cost of capital. A semiconductor company investing aggressively in new fabs at 25%+ ROIC may compound shareholder value faster than a low-CapEx commodity business.

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Frequently Asked Questions

What is CapEx to Revenue?+

CapEx to Revenue is the ratio of capital expenditures (PP&E investment) to total revenue, expressed as a percentage. A ratio of 3% means the company spends 3 cents on capital assets for every dollar of sales.

Is a lower CapEx ratio better?+

Generally, yes — for investors. Lower CapEx intensity means more revenue converts into free cash flow available for buybacks, dividends, or acquisitions. Software companies typically run below 5%. Capital-intensive sectors (utilities, telecom, semiconductors) may run 15-30%. The trade-off is that high-CapEx industries often have wider moats due to the capital barrier to entry.

How do you separate maintenance from growth CapEx?+

Companies rarely break this out. A common approximation is to use depreciation as a proxy for maintenance CapEx — the cost of replacing assets as they wear out. CapEx in excess of depreciation typically represents growth investment. Buffett used this distinction to compute "owner earnings."

Related Terms

Free Cash Flow per Share

FCF normalized by shares outstanding

Owner Earnings per Share

Net income + D&A - maintenance CapEx

Operating cash flow / revenue

After-tax operating profit / invested capital

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