Efficiency ratio
The efficiency ratio, a ratio that typically applies to banks, in simple terms is defined as expenses as a percentage of revenue (expenses / revenue), with a few variations. A lower percentage is better since that means expenses are low and earnings are high. It relates to operating leverage, which measures the ratio between fixed costs and variable costs.
Contents
Example
If expenses are $40 and revenue is $80 (perhaps net of interest revenue/expense) the efficiency ratio is 0.5 or 50% (40/80). Efficiency ratio is essentially how much you spend to make a dollar. In the above example, they spend $0.50 for every dollar they earn in revenue.
Citigroup
Citigroup, Inc. 2003:
- Revenues, net of interest expense: 77,442
- Operating expenses: 39,168
That makes operating expenses / revenue = 39,168/77,442 = 0.51 or 51%. The efficiency ratio is 0.51 or 51%.
Alternative
If "benefits, claims, and credit losses" are added to operating expenses the ratio gets worse.
51109/77,442=0.66
Alternative
If it's calculated as revenue divided by expenses (interest expense, "benefits, claims, and credit losses", operating expenses) it becomes 1 less the "income from continuing operations" margin.
68,380/94,713=0.72
See also
- Business margin
- Financial market efficiency
- Operating leverage
- Sortino ratio
- Business process reengineering
- Cost–benefit ratio
External links
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