Calculate the efficiency ratio by dividing non-interest expenses by revenue, including the bank version using net interest and non-interest income.

Operating expenses excluding interest expense. Use the same period and basis as revenue.

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Efficiency Ratio Formula

The following formula is used to calculate an efficiency ratio of a good or service of a business.

ER = NIE / R
  • ER is the efficiency ratio
  • NIE is the non-interest expenses ($)
  • R is the revenue ($)

To calculate an efficiency ratio, divide the non-interest expenses by the total revenue.

Efficiency Ratio Definition

Efficiency is a financial term used to describe a ratio of non-interest expenses to the total revenue generated through the selling of a service or good. A higher ratio means more non-interest expense per unit of the selected revenue basis; compare consistent definitions and appropriate peers. This is because a high ratio will mean a high amount of expenses relative to the revenue.

Efficiency Ratio Example

How to calculate an efficiency ratio?

  1. First, determine the non-interest expenses.

    Determine the non-interest expenses of the business.

  2. Next, determine the total revenue.

    Measure the total revenue of the same business over the same time period.

  3. Finally, calculate the efficiency ratio.

    Calculate the efficiency ratio with the equation above.

FAQ

What is an efficiency ratio?

An efficiency ratio is a financial term used to describe the efficiency of a business or product. It is a simple ratio of total non-interest expenses to total revenue.

efficiency ratio formula