Key Idea: Topic 3.6 is HL-only and focuses on efficiency ratios and gearing. These measures show how well a business manages working capital and how risky its long-term finance structure is. In HL exams, you are expected to calculate accurately, interpret what the result means, and link it to liquidity, borrowing capacity and overall financial risk.
⚙️ Efficiency ratios: **Efficiency ratios —** measure how efficiently the business manages stock, debtors and creditors. **Focus —** speed of money and stock moving through the business. **Main areas —** stock turnover, debtor days, creditor days. **Question they answer —** how efficiently is the business managing day-to-day finance?.
⚖️ Gearing: **Gearing ratio —** measures how much of capital employed comes from long-term debt. **Focus —** financial risk and debt dependence. **Main issue —** fixed interest commitments. **Question it answers —** how risky is the business’s financing structure?.
💨 Faster = usually better: **High stock turnover (times) —** stock sells quickly. **Low stock turnover (days) —** less cash tied up in stock. **Low debtor days —** customers pay quickly. **Higher creditor days —** business keeps cash longer.
🧠 Context and balance: **Very high stock turnover —** may risk stock shortages. **Very low debtor days —** strict credit terms may reduce sales. **Very high creditor days —** may damage supplier relationships. **Context matters —** supermarket vs jeweller gives very different normal values.
📈 High gearing: **High gearing (>50%) —** more debt, more risk. **Fixed interest payments —** profits more vulnerable if sales fall. **Harder to borrow more —** less financial flexibility. Risk of insolvency rises if repayments become difficult.
📉 Low gearing: **Low gearing (<25%) —** lower debt risk. More attractive to cautious investors and lenders. More flexibility to borrow later if needed. But may mean slower growth or greater reliance on equity.
HL exam tip: In ratio questions, do not stop at the number. Explain the business consequence. For example, high debtor days do not just mean slow payment — they can create liquidity pressure and borrowing needs.
Past-paper tip: Recent HL Paper 2 questions directly tested debtor days, creditor days, stock turnover (days), and gearing, with different mark allocations for questions with and without working. Be ready for both formats. The uploaded markscheme uses gearing = non-current liabilities ÷ capital employed × 100.
Calculation tip: If the question says no working required, still practise the full method when revising. If the question says show all your working, IB often awards a method mark as well as the final answer.
Example: A strong answer: Debtor days of 117 means customers take around four months to pay. This is high, so cash is coming in slowly, which could worsen liquidity problems and increase the need for overdraft finance.
Important: Common triggers are: calculate debtor days, creditor days, stock turnover or gearing; explain what one ratio shows; analyse the impact of a planned change on an efficiency ratio; or comment on whether the business has weak financial efficiency.
- Use the correct formula and show working if required
- State the result clearly with units or % where needed
- Explain what the result means
- Link it to liquidity, stock control, supplier relations or financial risk
- Compare with another figure, target or industry norm if possible
- Finish with a judgement, not just a description