# efficiency ratio

__Fin__a way of measuring the proportion of operating revenues or fee income spent on overhead expenses.__EXAMPLE__Often identified with banking and financial sectors, the efficiency ratio indicates a management’s ability to keep overhead costs low. In banking, an acceptable efficiency ratio was once in the low 60s. Now the goal is 50, while better-performing banks boast ratios in the mid 40s. Low ratings usually indicate a higher return on equity and earnings.This measurement is also used by mature industries, such as steel manufacture, chemicals, or car production, that must focus on tight cost controls to boost profitability because growth prospects are modest.The efficiency ratio is defined as operating overhead expenses divided by turnover. If operating expenses are $100,000, and turnover is $230,000, then:**100,000/230,000 = 0.43 efficiency ratio**However, not everyone calculates the ratio in the same way. Some institutions include all non-interest expenses, while others exclude certain charges and intangible asset amortization.A different method measures efficiency simply by tracking three other measures: accounts payable to sales, days sales outstanding, and stock turnover. This indicates how fast a company is able to move its merchandise. A general guide is that if the first two of these measures are low and third is high, efficiency is probably high; the reverse is likewise true.To find the stock turnover ratio, divide total sales by total stock. If net sales are $300,000, and stock is $140,000, then:**300,000/140,000 = 2.14 stock turnover ratio**To find the accounts payable to sales ratio, divide a company’s accounts payable by its annual net sales. A high ratio suggests that a company is using its suppliers’ funds as a source of cheap financing because it is not operating efficiently enough to generate its own funds. If accounts payable are $50,000, and total sales are $300,000, then:**50,000/300,000 = 0.14 × 100 = 14% accounts payable to sales ratio**

*The ultimate business dictionary.
2015.*

### Look at other dictionaries:

**Efficiency Ratio**— Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios can calculate the turnover of receivables, the repayment of liabilities, the quantity and usage of equity and the general… … Investment dictionary**efficiency ratio**— A ratio that measures the efficiency of labour or an activity over a period by dividing the standard hours allowed for the production by the actual hours taken. It is usually expressed as a percentage, using the formula: (standard hours allowed × … Accounting dictionary**efficiency ratio**— A ratio that measures the efficiency of labour or an activity over a period by dividing the standard hours allowed for the production by the actual hours taken. It is usually expressed as a percentage, using the formula: (standard hours allowed × … Big dictionary of business and management**Seasonal energy efficiency ratio**— The efficiency of air conditioners is often rated by the Seasonal Energy Efficiency Ratio (SEER) which is defined by the [Air Conditioning, Heating, and Refrigeration Institute] in its standard ARI 210=240, Performance Rating of Unitary Air… … Wikipedia**energy efficiency ratio**— noun Usage: often capitalized both Es&R : a number expressing the relative efficiency of an appliance (as a room air conditioner) that is obtained by dividing the unit s output in BTUs per hour by its energy requirement in watts * * * a measure… … Useful english dictionary**energy efficiency ratio**— a measure of the efficiency of a heating or cooling system, as a heat pump or air conditioner, equal to the ratio of the output in B.T.U./hour to the input in watts: A high efficiency home window air conditioner has an energy efficiency ratio of… … Universalium**Protein efficiency ratio**— (PER) is based on the weight gain of a test subject divided by its intake of a particular food protein during the test period.From 1919 until very recently, the PER had been a widely used method for evaluating the quality of protein in food.In… … Wikipedia**energy efficiency ratio**— en′ergy effi ciency ra tio n. cvb ene a measure of the efficiency of a heating or cooling system, equal to the ratio of the output in BTU per hour to the input in watts Abbr.: EER … From formal English to slang**Energy Efficiency Ratio**— (EER) The measure of the instantaneous energy efficiency of room air conditioners; the cooling capacity in Btu/hr divided by the watts of power consumed at a specific outdoor temperature (usually 95 degrees Fahrenheit) … Energy terms**Seasonal Energy Efficiency Ratio**— (SEER) A measure of seasonal or annual efficiency of a central air conditioner or air conditioning heat pump. It takes into account the variations in temperature that can occur within a season and is the average number of Btu of cooling… … Energy terms