Efficiency Ratio

The efficiency ratio is a financial metric used to measure a company’s ability to use its resources effectively to generate revenue. In banking, it is commonly used to assess how well a bank is managing its expenses relative to its income, calculated as non-interest expenses divided by total revenue. A lower efficiency ratio indicates better management and greater profitability, as the company is spending less to generate each dollar of income. The efficiency ratio is widely used by banks, financial institutions, and other businesses to evaluate operational efficiency and identify areas for cost reduction.

Example

A bank with an efficiency ratio of 50% is spending 50 cents for every dollar of revenue, indicating strong cost control and profitability.