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.

Related or Semi-related Video

Econ: What is Marginal Analysis?7 Views

00:00

And finance Allah shmoop what is marginal analysis All right

00:07

people You know that moment the one when you think

00:10

just one more One more cookie One more cup of

00:14

coffee One more bite and then just one more And

00:17

you know one more until you realize that one more

00:20

one more time maybe is not such a good idea

00:22

when you're having that just one more moment Economists call

00:26

this thinking on the margin The margin is just when

00:30

you add one more For instance your marginal benefit of

00:34

just one more cookie after you've already had one is

00:36

probably still maybe net positive But after you've had ten

00:40

cookies and your stomachs of rumbling saying What are you

00:43

doing to me Why to which you say I'm a

00:45

slave to my taste buds What's it to you Stomach

00:49

When the cost of just one Mohr outweighs the benefits

00:52

it's usually time to call it quits Well marginal analysis

00:55

is when we look at things from this perspective by

00:57

asking what would happen to the output if we added

01:00

just one Mohr input Well our cookie examples an example

01:03

of the law of diminishing marginal returns which is just

01:07

one way we can use marginal analysis diminishing marginal returns

01:11

It's when we get less and less benefit from the

01:14

same input So we get less and less enjoyment from

01:17

each cookie with each additional one that we eat until

01:19

eventually It's enjoyable anymore Like your digestive system can only

01:23

handle so much Marginal analysis has used everywhere when we

01:26

look at consumers consuming when businesses air trying to minimise

01:29

costs and when governments air tinkering around with the financial

01:32

models on howto incentivize us Teo do things any time

01:36

you see the word marginal Like in marginal cost of

01:39

production and marginal propensity to consume it refers to thinking

01:44

on the margin when the input changes a tiny bit

01:47

Well how does that affect the output in it What

01:49

rate for instance marginal propensity to consume asks when consumers

01:54

have more disposable income in their pockets How much more

01:57

money are they in fact spending well as opposed to

02:00

investing it or hoarding it under your mattress Because you

02:03

forgot inflation was a thing Oops What marginal analysis is

02:06

important for firms as well as cookie eaters Firms want

02:09

to make just one more just one more Just one

02:12

more of whatever they're selling like say a waffle irons

02:15

that make keyboard shaped waffles until they stopped making money

02:19

selling them the keyboard shaped waffle iron Producers find that

02:22

sweet spot where marginal costs equal marginal revenue which is

02:26

where the cost of just one more waffle iron equals

02:30

the revenue they make by selling that one more waffle

02:33

iron right If they go below it like they can't

02:35

sell it well then there actually losing money producing more

02:38

waffle irons Well just like when you ate cookies you

02:41

basically ate them until your marginal cost equalled your marginal

02:44

benefit As long as the marginal benefit is higher than

02:46

the marginal cost it's hard to say no to the

02:48

cookies whispering your name from the sugar stores in the

02:51

kitchen But when all of a sudden you realize eating

02:54

one more cookie is going to do more harm than

02:56

good when your marginal costs of just one more cookie

02:59

is higher than your marginal benefit of just one more

03:02

cookie well then you call it quits Unless you're a

03:04

mascots they want then your marginal cost Might it also

03:06

be benefits But we'll save that complication for Advanced Micro

03:09

economics The government uses marginal analysis on a mega scale

03:13

in the aggregate as economists say like when the Fed

03:16

is in the Federal Reserve lowers interest rates Jost a

03:19

smidge of a percentage making borrowing money cheaper to try

03:23

to get people to borrow just a smidge more Right

03:26

Okay well marginal analysis is all about tinkering at a

03:29

little more Take away a little less to see what

03:31

happens next time Your tinkering well maybe with deciding how

03:35

many keyboard shaped waffles you should make with your new

03:38

keyboard Waffle Iron Well just remember now you're thinking like 00:03:41.543 --> [endTime] an economist tasty

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