what does the efficiency ratio tell you 
efficiency ratios also known as activity ratios are used by analysts to measure the performance of a company s short term or current performance all of these ratios use numbers in a company s current assets or current liabilities quantifying the operations of the business an efficiency ratio measures a company s ability to use its assets to generate income for example an efficiency ratio often looks at various aspects of the company such as the time it takes to collect cash from customers or to convert inventory to cash this makes efficiency ratios important because an improvement in the efficiency ratios usually translates to improved profitability these ratios can be compared with peers in the same industry and can identify businesses that are better managed relative to the others some common efficiency ratios are accounts receivable turnover fixed asset turnover sales to inventory sales to net working capital accounts payable to sales and stock turnover ratio efficiency ratios for banksin the banking industry an efficiency ratio has a specific meaning for banks the efficiency ratio is non interest expenses revenue this shows how well the bank s managers control their overhead or back office expenses like the efficiency ratios above this allows analysts to assess the performance of commercial and investment banks efficiency ratio expenses revenue not including interest begin aligned text efficiency ratio frac text expenses dagger text revenue dagger text not including interest end aligned efficiency ratio revenueexpenses not including interest since a bank s operating expenses are in the numerator and its revenue is in the denominator a lower efficiency ratio means that a bank is operating better an efficiency ratio of 50 or under is considered optimal if the efficiency ratio increases it means a bank s expenses are increasing or its revenues are decreasing for example bank x reported quarterly earnings and had an efficiency ratio of 57 1 which was lower than the 63 2 ratio it reported for the same quarter last year this means the company s operations became more efficient increasing its assets by 80 million for the quarter 