How to Calculate an Efficiency Ratio

The efficiency ratio is an investing term used to describe the productivity of a bank. Basically, it represents how much money the bank must spend to generate each dollar it brings in. Here's how to calculate it.

Things You'll Need

• Bank's annual report

Instructions

1. The simplest way to calculate the efficiency ratio is this:Non-interest expense divided by revenue.You can find this information in the financial data section of a company's annual report, or 10-K.

2. For this example, we'll use the 2007 annual report of Fifth Third Bank. The bank reports its non-interest expense as $3,311 and its total revenue as $5,500 (numbers in millions). So the math looks like this:$3,311 (non-interest expense)divided by $5,500 (revenue)= 0.602.Move the decimal two places to the right, and you have an efficiency ratio of 60.2%.

3. Once you have your number, the next step is interpreting it. Basically, an increasing efficiency ratio is bad, because it means the bank is spending an increasing amount of money on expenses. A decreasing efficiency ratio, on the other hand, means management is keeping costs down. In general, a ratio of 50% or less is considered optimal.

Resources

• Read this Article in Spanish
• EDGAR, the Securities and Exchange Commission's database of company filings