What is the efficiency ratio?
The efficiency ratio is a measure of quantifying and analysing how efficiently a company handles its assets and liabilities internally. The efficiency ratio applies to companies, firms and banks and is a tool favoured by analysts to gauge the short term performance of a company.
Where have you heard about the efficiency ratio?
Sometimes referred to as the activity ratio, the efficiency ratio is often used by investors to examine how able a company is to achieve an income from their current assets. It’s determined by measuring a company’s short term assets or liabilities and evaluating their procedures within business.
What you need to know about the efficiency ratio.
The efficiency ratio's aim is to measure the turnover of receivables, the amount and use of equity, the reparation of liabilities and the general operations for inventory and machinery. The application of this ratio is often used within banks, helping them to quantify their overhead as a proportion of their revenue. The efficiency ratio enables analysts to work out the performance of investment and commercial banks alike. The lower the percentage of the ratio implies the greater efficiency of the company or bank.
Find out more about the efficiency ratio.
If you are interested in the efficiency ratio, take a look at our page on turnover ratio.