Efficiency ratio: Difference between revisions

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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, 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 = ⁠input output⁠ ^[1]

If expenses are $60 and revenue is $80 (perhaps net of interest revenue/expense) the efficiency ratio is 0.75 or 75% (60/80) – meaning that $0.75 are spent for every dollar earned in revenue.

An example

Citigroup, Inc. (2003):

Revenues, net of interest expense: 77,442^[2]
Operating expenses: 39,168^[3]

That makes the efficiency ratio = ⁠39,168/77,442⁠ = 0.51 or 51%.

If "benefits, claims, and credit losses", for 11,941, are added to operating expenses, the efficiency ratio worsens to ⁠51,109/77,442⁠ = 0.66

References

External links

Library resources about
Business efficiency

Resources in your library

Efficiency Ratio
Financial Ratio Analysis Archived 2016-06-24 at the Wayback Machine

Example

[1] Accounting Tools, 7 December 2023

[2] Citigroup 10K

[3] Citigroup 10K

[1]

[2]

[3]

@@ Line 1: / Line 1: @@
 <!--This topic needs revision. The efficiency ratio is a specific term that applies to banks only. See definition on Investopedia or your favorite bank's statements.-->
-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]], which measures the ratio between fixed costs and variable costs.
+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]], 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.
-'''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 = work output / work input <ref>{{citation |url=https://www.accountingtools.com/articles/what-is-the-formula-for-calculating-efficiency.html |title=Accounting Tools}}</ref>
+: Efficiency = {{big|{{sfrac|input | output}}}} <ref>{{citation |url=https://www.accountingtools.com/articles/what-is-the-formula-for-calculating-efficiency.html |title=Accounting Tools|date=7 December 2023 }}</ref>
-If expenses are $60 and revenue is $80 (perhaps net of interest revenue/expense) the efficiency ratio is 0.75 or 75% (60/80) – meaning that $0.75 are spent for every dollar earned in revenue.
+If expenses are {{US$|long=no|60}} and revenue is {{US$|long=no|80}} (perhaps net of interest revenue/expense) the efficiency ratio is 0.75 or 75% (60/80) – meaning that {{US$|long=no|0.75}} are spent for every dollar earned in revenue.
 ===An example===
@@ Line 15: / Line 14: @@
 *Operating expenses: 39,168<ref>{{citation |url=https://www.sec.gov/Archives/edgar/data/831001/000104746904006087/a2129612z10-k.htm |title=Citigroup 10K}}</ref>
-That makes the efficiency ratio = 39,168/77,442 = 0.51 or 51%.
+That makes the efficiency ratio = {{sfrac|39,168|77,442}} = 0.51 or 51%.
-If "benefits, claims, and credit losses", for 11,941, are added to operating expenses, the efficiency ratio worsens to 51,109/77,442 = 0.66
+If "benefits, claims, and credit losses", for 11,941, are added to operating expenses, the efficiency ratio worsens to {{sfrac|51,109|77,442}} = 0.66
 <!-- This really makes no sense: it inverts numerator and denominator in the definition! And it is impossible to make sense of the numbers. Can anybody fix it, please
 ===Alternative===
@@ Line 44: / Line 43: @@
 *[http://www.investopedia.com/terms/e/efficiencyratio.asp Efficiency Ratio]
-*[http://www.financeratioanalysis.com Financial Ratio Analysis]
+*[http://www.financeratioanalysis.com Financial Ratio Analysis] {{Webarchive|url=https://web.archive.org/web/20160624183210/http://www.financeratioanalysis.com/ |date=2016-06-24 }}
 ===Example===