- Business efficiency
The efficiency ratio, a ratio that is typically applied 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 big. It is related to
operating leverage , which measures the ratio between fixed costs and variable costs.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). 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
Citigroup, Inc. 2003:
*Revenues, net of interest expense: 77,442
*Operating expenses: 39,168That makes operating expenses / revenue = 39,168/77,442 = 0.51 or 51%. The efficiency ratio is 0.51 or 51%.
Alternative
If "benefits, claims, and credit losses" are added to operating expenses the ratio gets worse. 51109/77,442=0.66
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
ee also
*
Business margin
*Operating leverage
*Sortino ratio
*Business process reengineering External links
* [http://www.investopedia.com/terms/e/efficiencyratio.asp Efficiency Ratio]
Example
* [http://finance.yahoo.com/q/is?s=C&annual C: Income Statement for CITIGROUP INC - Yahoo! Finance]
* [http://www.citigroup.com/citigroup/fin/ar.htm Citigroup - Annual Reports & Proxy Statements]
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