Capital intensity has a direct and mechanical impact on the requirement for commercial profitability (operating margin) for a company to be successful.

Here’s how this relationship is structured:

1. The mechanical link between Rotation and Margin (ROCE = Margin x Rotation)

Economic performance is measured by the ROCE (Return On Capital Employed). This profitability is the product of two ratios:

• Commercial Profitability (ROS):  Operating Profit / Revenues (how much I earn on each sale).
• Asset Turnover: Revenues / Capital Employed (how many sales I generate with 1€ of capital).

ROCE} = Margin (ROS) × Rotation (ATO)

2. The Impact of Capital Intensity

A high capital intensity means that a lot of capital is needed to generate turnover (heavy factories, infrastructure, large inventories). This results in low capital turnover (Asset Turnover < 1 or close to 1).

• If the capital intensity is high (low turnover): To maintain a satisfactory ROCE (higher than the cost of capital), the company is obliged to generate a very high commercial profitability (margin).
  • Example McDonald’s (2003): With a heavy real estate policy (owner of the walls), the turnover of capital is only 0.8. To achieve a ROCE of 32%, McDonald’s must generate a very strong commercial margin of 40%.
  • Example Vantage Towers (telecom towers): This is a very capital-intensive activity with a low turnover. It therefore requires very high EBITDA margins (in the order of 50% or more) to justify the investment.
• If the capital intensity is low (high turnover): The company can afford lower commercial margins while remaining efficient.
  • Example Mass Retail (Walmart, Carrefour): This sector operates with a high assets turnover (few fixed assets compared to the volume of sales and negative WCR). It can therefore be viable with very low operating margins (3% to 5%), as the volume compensates for the low unit margin.

3. Policy Consequence

To improve their performance without always being able to increase their prices (margin), companies often seek to reduce their capital intensity (improve turnover):

• Outsourcing (Asset Light): By outsourcing production to subcontractors or renting real estate instead of buying it, the company reduces its Capital Employed (the denominator of ROCE). This mechanically increases the rotation, allowing a good ROCE to be maintained even if the margin erodes slightly or remains stable.
• Franchise model: McDonald’s generates most of its profitability through franchisees. The rental income and royalties received offer a very high margin (operating margin of 78% on the franchised activity compared to 14.5% on the own activity in the example cited), which compensates for the heavy capital invested in the premises.

In summary, the more capital a company needs to operate (high intensity), the more demanding it must be on its commercial margin to satisfy its investors. Conversely, a “light” capital company can thrive with low margins (volume model).