What does a higher efficiency ratio indicate about a company?

A higher efficiency ratio signifies that a company is utilizing its resources effectively to generate revenue. This ratio measures how well a company converts its inputs (such as labor and materials) into outputs (such as sales). An increase in this ratio typically indicates that a company is managing its operations more effectively, leading to lower costs and higher profitability.

When resources are used efficiently, a company can maximize production without disproportionately increasing expenses. This means that the company can produce more output with the same or fewer inputs, which is indicative of a well-managed organization. It effectively reflects strong operational practices, better workforce productivity, and prudent management of assets.

In this context, the other options address conditions that would detract from efficiency. Unproductive operations, excessive inventory, and high financial costs all suggest inefficiencies rather than optimal use of resources. Hence, a higher efficiency ratio stands out as a marker of positive operational performance.