Business efficiency

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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.

Example[edit]

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[edit]

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[edit]

If "benefits, claims, and credit losses" are added to operating expenses the ratio gets worse.

51109/77,442=0.66

Alternative[edit]

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[edit]

External links[edit]

Example[edit]