Efficiency ratio
Encyclopedia
The efficiency ratio, a ratio that is typically applied 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 is related to operating leverage
, which measures the ratio between fixed costs and variable costs.
That makes operating expenses / revenue = 39,168/77,442 = 0.51 or 51%. The efficiency ratio is 0.51 or 51%.
51109/77,442=0.66
68,380/94,713=0.72
Operating leverage
The 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 a company's operating income is.-Definition:There are various measures of operating leverage,...
, which measures the ratio between fixed costs and variable costs.
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 spent $0.50 for every dollar they earned 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 efficiencyFinancial market efficiencyIn the 1970s Eugene Fama defined an efficient financial market as "one in which prices always fully reflect available information”.The most common type of efficiency referred to in financial markets is the allocative efficiency, or the efficiency of allocating resources.This includes producing the...
- Operating leverageOperating leverageThe 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 a company's operating income is.-Definition:There are various measures of operating leverage,...
- Sortino ratioSortino ratioThe Sortino ratio measures the risk-adjusted return of an investment asset, portfolio or strategy. It is a modification of the Sharpe ratio but penalizes only those returns falling below a user-specified target, or required rate of return, while the Sharpe ratio penalizes both upside and downside...
- Business process reengineeringBusiness process reengineeringBusiness process re-engineering is the analysis and design of workflows and processes within an organization.According to Davenport a business process is a set of logically related tasks performed to achieve a defined business outcome....
- Cost-benefit ratio