Capital needs revenue-based score
The Capital needs revenue-based score reflects the level of capital expenditure relative to the company's revenue.
Capital expenditure (capex)
The relationship between a company's capital expenditure and its revenue and fixed assets is a measure of how capital-intensive it is. All else being equal, from an investor's point of view, a less capital-intensive company is preferable to a more capital-intensive one.
Capital expenditures, as measured by Gradement, represent the expenses necessary to maintain the company's current level of production and revenue. If a company decided not to incur these capital expenditures, it would, in practice, lead to decapitalization, which would be reflected in its income, cash flow, and profit accounts.
Therefore, all else being equal, a company that requires a lower level of capital expenditure relative to its revenue will be better off than a company whose capex is higher. This is because it can use the funds not needed for capital maintenance for other activities or distribute them to shareholders as dividends.
How to use the score
A high Capital needs score indicates that the company is not very capital-intensive, meaning it does not need to provide large funds relative to its revenue to maintain its production and sales levels. On the other hand, a low value reflects a very capital-intensive company. The following table can be used as a reference for this score:
| Score value range | Interpretation |
|---|---|
| 0 to 5 | Capital-intensive company |
| 5 to 7 | Low capital-intensive company |
| 7 to 10 | No capital-intensive company |
Capital expenses used by gradement
The capital expenditures referred to above are what we call maintenance capital expenditures, as opposed to the accounting concept of capital expenditure normally used in annual accounts.
Capital expenditures, as defined in the financial statements, refer to all the funds that the company uses, over an accounting period, to acquire new fixed capital or to improve the existing fixed capital. For example, all the funds used in the construction of a new factory would form part of the general concept of capital expenditure.
However, Gradement uses a customized version of capital expenditures called maintenance capital expenditures. This variant includes only the funds necessary to maintain the company's current level of activity. Any funds used to increase the company's level of activity are not part of this maintenance capital expense.
It is very difficult to estimate these maintenance capital expenditures, as this information is not generally shown in a company's annual statements. However, given the importance of this accounting variable for estimating a company's capital needs, we estimate this item based on the growth experienced by the company in the last accounting period. Note that this calculation is just a conservative estimate of the company's true maintenance capital expenditure level.