What is Capital Efficiency?

What is Capital Efficiency?: "Capital efficiency has to do with understanding the ratio of output in comparison to the amount of capital expenditure involved in maintaining the operation of a business or a product line. This simple comparison serves as a way to determine if a particular operation should be continued as is, continued with some adjustments, or abandoned and the resources diverted to other projects.

The basic formula for calculating capital efficiency involves dividing the average value of output by the rate of expenditure for the same period of time. Output divided by expenditure will help to make it clear if a venture is currently generating a modest profit, is approaching a point where profitability will be realized once expenditures are decreased, or if there is no real value in continuing to fund the venture. While the latter situation is one to avoid at all costs, the two former possible states are not situations that should be considered negative.

Because many business ventures begin with a higher level of capital expenditures, a project rarely realizes a profit in the first stages of the operation. The expectation is that after the initial launch, some expenses will be settled and not be recurring. As the rate of expenditure decreases and the output or production increases, the opportunity for profit expands. For this reason, periodic calculation of the capital efficiency of a"