The value of the capital needs asset-based rating is a reflection of the level of capital expenditure relative to the company's fixed assets.
The relationship between the company's capital expenditure and its level of revenue and fixed assets a measure of how capital intensive the company is. All things being equal, and from the investor point of view, a less capital-intensive company will be preferable from any other more capital-intensive.
Capital expenditures, as measured by Gradement, represents expenses necessary to maintain the company's current level of production and revenue. If the company decided not to incur these capital expenditures, there would in practice be a decapitalization of the company with its consequent reflection in the income, cash flows and profit accounts.
Therefore, all things being equal, a company that requires a lower level of capital expenditure in relation to its fixed assets, will be better off than any other company whose capex is higher, because it can use those funds not need in the maintenance of capital, for any other activity required by the company, or to distribute it to the shareholders in the form of dividends.
A high capital needs rating value indicates that the company is not very capital-intensive in the sense that it does not have to provide large funds, in relation to its level of fixed assets, to maintain the same level of production and sales. On the other hand, a low value is a reflection of a very capital-intensive company. The following table can serve as reference for the use of this rating:
|Rating value range||Interpretation|
|0 - 0||Very capital-intensive company|
|0 - 5||Capital-intensive company|
|5 - 9||Low capital-intensive company|
|9 - 10||Non capital-intensive company|
The capital expenditures referred to above are what we call maintenance capital expenditures, as opposed to the accounting concept of
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 in Gradement we use a customized version of the capital expenditures that we call maintenance capital expenditures. This variant of capital expenditure includes not all the funds used, but only considers those that are necessary to maintain the same level of activity of the company. All funds used to increase the level of activity of the company are not part of this maintenance capital expense.
It is very difficult to estimate these maintenance capital expenditures since this information is generally not shown in the company's annual statements. However, given the importance of this accounting variable to estimate the capital needs of the company, in gradement we estimate this item based on the growth experienced by the company in the last accounting period. But this calculation made by Gradement is just a conservative estimate of the company's true maintenance capital expenditure level.