An efficiency ratio is used to evaluate how efficient a financial institution i. The ratio is mainly used with banks and is commonly calculated by dividing the expenses that the bank incurs by the revenue. This number is then converted to a percentage. A bank with a lower percentage is viewed as more efficient than a bank with a higher one.

A bank will a low efficiency ratio indicates that the bank is not losing the revenue it generates to pay for overhead and operational costs. Analysts and managers can also look at the ratio and determine how much the institution has to spend in order to generate revenue.

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