Efficiency Ratio

A company's job is to turn revenue into profit. Money comes in and the company tries to keep as much of it as it can.

An efficiency ratio measures how well a company does that. It looks at how effectively the company uses its expenses. A weak efficiency ratio means the company has a lot of slack in its operations...it's giving away a lot of money unnecessarily, or at least not using its assets ideally. A strong efficiency ratio means the company does a good job of turning its revenue into profit.

The idea of an efficiency ratio comes up a lot when evaluating banks. Companies (and analysts/investors looking at those companies) can see how much revenue gets eaten up by overhead. Also, it allows the banks (and anyone looking at them) to review how well they turn assets into revenue.