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Efficiency ratio
From Wikipedia, the free encyclopedia
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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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%. Efficiency ratio is essentially how much you spend to make a dollar. In the above example, they spent $0.50 for every dollar they earned in revenue.
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%.
If "benefits, claims, and credit losses" is added to operating expenses the ratio get worse.
51109/77,442=0.66
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