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What Does Efficiency Ratio Measure?

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Efficiency ratio is used to determine the efficiency of a bank. Different banks have different ways to calculate efficiency ratio. The most popular way of calculating efficiency ratio is: Non-interest expense divided by Total Revenue subtracts Interest Expense. The main purpose of calculating efficiency ratio is to estimate the overhead structure of a financial institution. A company will survive only if it keeps cost down. Efficiency ratio will give us an idea as to how effectively a bank is operating. It can be said that the efficiency ratio is the measurement of a bank's profitability. You might want to know the ratio of a bank's efficiency before you decide to make a big financial deal.

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