The efficiency ratio indicates the expenses as a percentage of revenue (''expenses'' / ''revenue''), with a few variations – it is essentially how much a corporation or individual spends 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 Operating leverage is a measure of how revenue growth translates into growth in operating income. It is a measure of leverage, and of how risky, or volatile, a company's operating income is.
Definition
There are various measures of operating leve ...
, which measures the ratio between fixed costs and variable costs.
Efficiency means the extent to which cash is generated over time and relative to other enterprises. ''Efficiency ratios'' for a given year may therefore be used to determine whether an enterprise has generated enough cash in relation to other years and in relation to other institutions (Koen and Oberholster, 1999). For measuring efficiency can be used receivable collection period ratio.
Formula
: Efficiency =
If expenses are and revenue is (perhaps net of interest revenue/expense) the efficiency ratio is 0.75 or 75% (60/80) – meaning that are spent for every dollar earned in revenue.
An example
Citigroup, Inc. (2003):
*Revenues, net of interest expense: 77,442
*Operating expenses: 39,168
That makes the efficiency ratio = = 0.51 or 51%.
If "benefits, claims, and credit losses", for 11,941, are added to operating expenses, the efficiency ratio worsens to = 0.66
See also
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Business margin
A financial ratio or accounting ratio is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial ...
*
Financial market efficiency
*
Operating leverage Operating leverage is a measure of how revenue growth translates into growth in operating income. It is a measure of leverage, and of how risky, or volatile, a company's operating income is.
Definition
There are various measures of operating leve ...
*
Sortino ratio
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Business process reengineering
Business process re-engineering (BPR) is a business management strategy originally pioneered in the early 1990s, focusing on the analysis and design of workflows and business processes within an organization. BPR aims to help organizations fundam ...
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Cost–benefit ratio
References
External links
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Efficiency RatioFinancial Ratio Analysis
Example
C: Income Statement for CITIGROUP INC - Yahoo! Finance
Financial ratios