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3.6 Efficiency ratio analysis (HL only)

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  • 3.6 Efficiency ratio analysis (HL only)

3.6 Efficiency ratio analysis (HL only)

Learning outcomes

This section of the IB Business Management syllabus examines efficiency ratio analysis for financial strategic analysis (for HL students only). It requires students to understand the purpose and use of financial ratios, extending their understanding of profitability, efficiency and liquidity ratios previously discussed in Unit 3.5. HL students also need to examine the various strategies that can be used to improve a firm's efficiency ratios.

Ratio analysis is a financial analysis tool used in the interpretation and assessment of an organization's final accounts, i.e. the firm's financial statements, consisting of the balance sheet and income statement ( profit and loss account). Such analysis helps decision-makers and other stakeholders to evaluate a business organization's financial performance by exposing various financial strengths and weaknesses. Finally, ratio analysis helps to make meaningful historical and inter-firm comparisons by analysing past data of the business, and those of other businesses in the same (or even different) industries for benchmarking purposes.

The learning outcomes (or assessment objectives) for this section of the IB Business Management syllabus are:

  • The following further efficiency ratios (AO2, AO4):
    • inventory / stock turnover
    • debtor days
    • creditor days
    • gearing ratio
  • Possible strategies to improve these efficiency ratios (AO3)
Top tip!

Business Management is an interrelated discipline so students should strive to make links between the various topics of the subject. For example, although ratio analysis is used to measure the financial performance of a business, the growing emphasis on providing a sustainable future for the planet and its people means that businesses are increasingly being evaluated for their ethical performance.

John Elkington (1997) proposed to evaluate businesses from the perspective of the “ triple bottom line”:

  • Planet
  • People
  • Profits

Elkington's triple bottom line model is also related to corporate social responsibility (CSR).

Read more about Elkington's triple bottom line here.

InThinking Business Management resources (HL only)

Click the hyperlinks below to access the InThinking resources for this particular section of the IB Business Management syllabus.

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