# Capital Output Ratio

(diff) ← Older revision | Latest revision (diff) | Newer revision → (diff)

## What is Capital Output Ratio

The capital-output ratio is a financial ratio that measures the efficiency with which a company is using its capital to generate output. It is calculated by dividing a company's capital (such as debt and equity) by its output (such as sales or production). The higher the capital-output ratio, the more efficiently a company is using its capital to generate output.

The purpose of the capital-output ratio is to provide an indication of how effectively a company is using its capital to generate revenue and profits. A low capital-output ratio may indicate that a company is using its capital efficiently and generating a high return on investment. On the other hand, a high capital-output ratio may indicate that a company is using a larger amount of capital in relation to its output, which could lead to a lower return on investment.

There are two main components of the capital-output ratio: capital and output. Capital includes the funds that a company has raised through debt and equity financing. Output can be measured in a variety of ways, such as sales or production, and is used to represent the economic activity of a company.

An example of the capital-output ratio would be a company with a capital of \$100,000 and an output of \$200,000. The capital-output ratio for this company would be 0.5, calculated as follows:

Capital Output Ratio = Capital / Output = \$100,000 / \$200,000 = 0.5

This indicates that the company is generating \$2 of output for every \$1 of capital it has.

It is important to note that the capital-output ratio should be considered in conjunction with other financial ratios and metrics in order to get a complete picture of a company's financial performance. A low capital-output ratio may indicate that a company is using its capital efficiently, but it may also be a result of the company having a low level of economic activity. Similarly, a high capital-output ratio may indicate that a company is using a larger amount of capital in relation to its output, but it may also be a result of the company operating in a capital-intensive industry.

1. Capital Intensity
2. Output
3. Production Function
4. Capital Input
5. Return on Investment (ROI)
6. Marginal Productivity of Capital
7. Gross Fixed Capital Formation
8. Economic Growth
9. Total Factor Productivity
10. Capital to Labor Ratio