The efficiency ratio indicates the expenses as a percentage of revenue (expenses / revenue), with a few variations – it is essentially how much you spend to make a dollar; entities are supposed to attempt minimizing efficiency ratios (reducing expenses and increasing earnings). The concept typically applies to banks. It relates to operating leverage, which measures the ratio between fixed costs and variable costs.
Contents
Formula
Efficiency = output/input
If expenses are $60 and revenue is $80 (perhaps net of interest revenue/expense) the efficiency ratio is 0.75 or 75% (60/80) – meaning that $0.75 are spent for every dollar earned in revenue.
An example
Citigroup, Inc. (2003):
That makes the efficiency ratio = 39,168/77,442 = 0.51 or 51%.
If "benefits, claims, and credit losses", for 11,941, are added to operating expenses, the efficiency ratio worsens to 51,109/77,442 = 0.66