What Is the Efficiency Ratio?

The efficiency ratio is typicaꦕlly used to analyze how well a comp🙈any uses its assets and liabilities internally.

An 澳洲幸运5官方开奖结果体彩网:efficiency ratio can calculate the turnover of receivables, the repayment of liabilities, the quantity and usage of equity, and the general use of inventory and machinery. This ratio can also be used to track and analyze the performance of commer🅷cial and investment banks.

What Does the Efficiency Ratio Tell You?

Efficiency ratios, also known as activity ratios, are used by analysts to measure the performance of a company’s short-term or current performance. All of these ratios use numbers in a company’s 澳洲幸运5官方开奖结果体彩网:current assets or 澳洲幸运5官方开奖结果体彩网:current liabilities, quantifying the operations of the business.

An efficiency ratio measures a company’s ability to use its assets to generate income. For example, an efficiency ratio often looks at various aspects of the company, such as the time it takes to collect cash from customers or to convert 澳洲幸运5官方开奖结果体彩网:inventory to cash. This makes efficiency ratios important, because an improvement in the efficiency ra🐷tios usually translates to improv🍰ed profitability.

These ratios 澳洲幸运5官方开奖结果体彩网:can be compared wit♎h peers in the same industry and can identify businesses that are better managed relative to the others. Some common efficiency ratios are 澳洲幸运5官方开奖结果体彩网:accounts receivable turnover, 澳洲幸运5官方开奖结果体彩网:fixed asset turnover,🔯 sales to inventory, sales to net working capital, accounts payable to sales, and stock turnover ratio.

Efficiency Ratios for Banks

In the banking industry, an efficiency ratio has a specific meaning. For banks, the efficiency ratio is non-interest expenses/revenue. This shows how well the bank’s managers control their overheജad (or “back office”) expenses.

Like the efficiency ratios above, this allows analysts to assess the performance of commercial and investment banks.

Formula for Efficiency Ratio for Banks

$\begin{aligned} &\text{Efficiency Ratio} = \frac{\text{Expenses}^{\dagger}}{\text{Revenue}} \\ &\dagger \text{not including interest}\\ \end{aligned}$​Efficiency Ratio=RevenueExpenses†​†not including interest​

Since a bank’s 澳洲幸运5官方开奖结果体彩网:operating expenses are in the numerator and its revenue is in the denominator, a lower efficiency ratio means that a bank is oper🎃ating better.

An efficiency ratio of 50% or under is considered optimal. If the effic💙iency ratio increases, it means a bank’s expenses are increasing or its revenues are decreasing.

For example, Bank X reported quarterly earnings and had an efficiency ratio of 57.1%, which was lower than the 63.2% ratio it reported for the same quarter last year. This means the company’s operations became more efficient, increasing its assets by $80 million for the quarter.

The Bottom Line

The efficiency ratio typically analyzes how well a company uses its assets and liabilities internally. It can calculate the turnover 🎀of receivables, the repayment of liabilities, the quantity and usage of equity, and the general use of inventory and machinery. It can also be used to track and analyze the performance of c🐼ommercial and investment banks.