3.6 Efficiency ratio analysis questions for IB Business Management

Okanagan Cedarworks

[1] Okanagan Cedarworks Ltd (OCW) is a private limited company in Kelowna, Canada. It makes garden tables, chairs and loungers from western red cedar and sells them to garden centres and home-improvement retailers across western Canada. Retailers are given 30 days’ credit. Most sales are made between March and June.

[2] In 2025 OCW’s managing director, Daniel Tremblay, increased the range from 40 to 75 designs, hoping to attract younger customers. Several of the new designs sold slowly, and by December the warehouse was full of finished furniture. Two large retailers have also started to pay later than agreed.

[3] OCW’s finance manager, Aiko Sato, is worried that too much cash is tied up in stock. She has suggested two strategies: making the slow-selling designs only to order, and holding a clearance sale of the unsold designs at a 25 % discount before the next spring season.

Table 1: Extracts from OCW’s final accounts for the years ending 31 December (C$000)

Table 2: Selected efficiency ratios for OCW, 2024

Hearthwise Retrofit CIC (HRC)

Read the resources and answer the questions that follow.

Hearthwise Retrofit CIC (HRC) is a community interest company* in Liverpool, UK, founded in 2019 by Joanne Okoro, a former social worker, and Gareth Pryce, a builder. It trains young people leaving the care system as installers and fits insulation, new windows and heat pumps in cold, damp homes. Most of its work is for low-income households under a government energy-efficiency grant scheme. HRC employs 38 people, 22 of them care leavers.

* community interest company (CIC): a UK limited company for social enterprises; its assets must be used for the community and dividends to shareholders are capped.

Image: a red-brick terraced house wrapped in scaffolding; a young installer in an HRC hoodie fixes white insulation boards to the wall while a grandmother watches from the doorstep with a mug of tea. Slogan: “Warm homes, bright futures”.

Resource 1 – News article from the *Merseyside Business Post*

Grant delays leave small installers out in the cold

Installers working on the government’s home-energy grant scheme say they now wait an average of 90 days to be paid after a home passes inspection. “We pay for materials and wages up front, then wait three months,” said Joanne Okoro of HRC. “We are busier than ever and have never had less cash.” The government says it is “working to speed up payments”.

Resource 2 – Social media posts from Bernadette, an HRC customer

Forty years in this house and the first winter I haven’t had black mould on the bedroom wall. My gas bill is down by a third. The lads from Hearthwise were polite, tidy and told me all about their training. [1/2]

Only thing – they had to stop for two weeks halfway through because “materials hadn’t been paid for yet”. Hope they’re OK, they’re a credit to Liverpool. [2/2]

Resource 3 – HRC’s final accounts

Table 1: Statement of profit or loss for the years ended 31 December (£000)

Table 2: Statement of financial position as at 31 December 2025 (£000)

In 2024 HRC’s current ratio was 1.64, its acid test ratio 1.18 and its ROCE 46.32 %.

Resource 4 – Internal email from Gareth Pryce to Joanne Okoro

From: Gareth Pryce, Operations Director

To: Joanne Okoro, Managing Director

Subject: Cash, contracts and choices

We have reached our £150 000 overdraft limit. Two opportunities have come up:

1. Mersey Homes, a housing association, wants us to retrofit 300 homes over two years at £8 000 per home. Margins are like our grant work (gross profit margin about 28 %), and it pays 60 days after each home is finished.

2. Private homeowners in the wealthier suburbs keep asking for quotes. Private work earns a gross profit margin of about 40 %, and customers pay a 30 % deposit before we start. At present it is only 15 % of our revenue.

A social bank has offered a £250 000 loan at 7 % over six years; our overdraft costs 12 %. Joanne, I know you worry that private work is not why we exist. But if we run out of cash, we help nobody.

CONFIDENTIAL: this email and any attachments are intended only for the named recipients.

Resource 5 – Comparison of HRC’s work (2025)

Resource 6 – Interview with Kyle, aged 20, an HRC trainee installer

“I left care at 18 with nothing. HRC gave me a trade and a team that actually checks I’m OK. When we fit a heat pump for a pensioner who’s been cold for years, that feels like the point. I wouldn’t mind doing some posh houses too if it keeps us going – but I wouldn’t want that to be all we do.”

Siobhán Kearney is a sole trader who runs a bakery café in Galway, Ireland. After opening a second café in 2025, she owes her flour and dairy suppliers €38 000, all due for payment this month, but has only €9 000 in the bank. Her accountant has told her that the business is now insolvent. One supplier has said it may ask the court to declare Siobhán bankrupt if it is not paid within 60 days.

Distinguish between insolvency and bankruptcy, with reference to Siobhán’s situation.

Enat Nutrition PLC (EN)

Read the resources and answer the questions that follow.

Enat Nutrition PLC (EN) is a social enterprise in Addis Ababa, Ethiopia, founded in 2018 by Dr Meron Tesfaye, a children’s nutrition specialist. Enat means “mother” in Amharic. EN makes a fortified porridge flour for babies and young children from teff, chickpeas and barley, with an imported vitamin and mineral mix (premix). It sells single-serving 50 g sachets for ETB 15 through small shops and a network of women sales agents, and 1 kg bags in bulk to non-governmental organizations (NGOs) and health programmes that treat malnourished children. The flour keeps for nine months. EN reinvests all its profit.

In Ethiopia a private limited company is often called a “PLC”; its shares are not sold to the public.

Image: a small orange sachet printed with a smiling mother feeding a baby from a spoon, next to a bowl of creamy porridge. Text on the sachet: “Enat – strong start, bright future. 50 g, ETB 15”.

Resource 1 – News article from the *Addis Business Review*

Dollar shortage squeezes local manufacturers

Ethiopian manufacturers that rely on imported inputs say it can take months to obtain foreign currency from banks. Many buy large quantities whenever dollars become available, tying up cash in stock. “We cannot make a single sachet without the premix,” says EN’s finance manager, Dawit Alemu. Meanwhile, stunting caused by poor nutrition still affects more than a third of Ethiopian children under five.

Resource 2 – Social media posts from Hirut, a mother in Adama

My son was so thin the clinic was worried. The health worker gave us Enat bags for three months and now he is running everywhere! Now I buy the sachets from our corner shop. [1/2]

But last month the shop had none for two weeks, and one sachet I bought was past its date. I hope Enat can make more – every mother in my area wants it. [2/2]

Resource 3 – Extract from EN’s accounts (ETB million)

Table 1: Selected financial information

In 2025, 60 % of sales revenue came from NGOs and health programmes (on credit) and 40 % from sachets (cash sales).

Resource 4 – Internal email from Dawit Alemu, finance manager, to Dr Meron

From: Dawit Alemu, Finance Manager

To: Dr Meron Tesfaye, Managing Director

Subject: Before we sign for the new line

You want a second production line (ETB 20 million) to double output. The bank will lend it at 18 % a year, but our ratios worry me:

• the NGOs take more than three months to pay us;

• we hold six months of premix because we never know when we will get dollars again, and ETB 1.4 million of finished flour expired in our warehouse last year;

• our gearing is already high for a business of our size.

A large NGO, Hope for Children International, has offered a two-year contract that would use most of the new line’s output, at our normal price, but on 120-day payment terms. Should we sign?

CONFIDENTIAL: this email and any attachments are intended only for the named recipients.

Resource 5 – Letter from Selam Pharma Imports

“We hold foreign-currency import licences and keep stocks of vitamin and mineral premix in Addis Ababa. We can supply EN every two weeks at a price 6 % higher than EN pays when it imports directly. EN would pay us in birr, 30 days after delivery.”

Resource 6 – Survey of shopkeepers who sell EN sachets (120 replies)

Sentul Precision Engineering Sdn Bhd makes metal components for medical devices in Kuala Lumpur, Malaysia. Table 1 shows an extract from its statement of financial position.

Table 1: Extract from the statement of financial position of Sentul Precision Engineering as at 31 December 2025 (RM000)

Using Table 1, calculate Sentul Precision Engineering’s gearing ratio (show all your working).

Tumaini Wholesale Ltd, based in Nairobi, Kenya, distributes solar lanterns and phone chargers to about 900 small shops across East Africa. Almost all its sales are on credit, and its stated credit terms are 45 days. In 2025 Tumaini’s sales revenue was KES 146 million, and at the end of the year its debtors were KES 24 million. Several shop owners in rural areas pay only when the Tumaini sales representative visits them in person.