Efficiency ratio
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>>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 of a business is 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 big. It's the "reverse" operating leverage: revenue / expenses.
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[edit] 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), the operating leverage is 2.0 or 200%. Yes
[edit] 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%. Or the other way revenue / expenses 77,442/39,168 = 1.98. The "operating leverage" is 198%.
[edit] Alternative
If "benefits, claims, and credit losses" is added to operating expenses the ratio get worse.
51109/77,442=0.66
[edit] 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
