Brief Definition
The efficiency ratio is a financial metric used to evaluate how well a company uses its assets and manages its operations to generate income.
Further Explanation
The efficiency ratio is a financial metric used to evaluate how well a company uses its assets and manages its operations to generate income. It measures the proportion of a company’s expenses relative to its revenue, often used to assess the performance of banks and financial institutions. A lower efficiency ratio indicates higher efficiency, meaning the company is spending less to generate income.
Example:
A bank has an efficiency ratio calculated by dividing its non-interest expenses by its revenue. If the bank has $1 million in non-interest expenses and $2 million in revenue, its efficiency ratio would be 0.5, or 50%. This means that the bank spends 50 cents to generate every dollar of revenue. Lowering this ratio would indicate improved efficiency and better cost management.