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Warning Warning Warning HL only!

Efficiency ratios AO2, AO4

AO2 You need to be able to: Demonstrate application and analysis of knowledge and understanding Command Terms: These terms require students to use their knowledge and skills to break down ideas into simpler parts and to see how the parts relate: Analyse, Apply, Comment, Demonstrate, Distinguish, Explain, Interpret, Suggest

AO4 You need to be able to Demonstrate a variety of appropriate skills. Command Terms These terms require you to demonstrate the selection and use of subject-specific skills and techniques: Annotate, Calculate, Complete, Construct, Determine, Draw, Identify, Label, Plot, Prepare

Efficiency ratios show how effectively the business is using its resources. Shareholders in particular will want to know how well the firm is using their investment capital! It is advisable for the business to get as much turnover (revenue) from its assets as possible and at the same time it is not a good idea for it to have too many assets in the form of stock or debtors.

Financial efficiency can be examined by using the following ratios:

  • Return on capital employed (see previous as ROCE can also be classed as a profitability ratio)
  • Stock turnover
  • Debtor days
  • Creditor days
  • Gearing Ratio