Efficiency Ratio

Efficiency ratio is a name carried by two distinct measures rather than one. In general accounting it is a family name for the activity or turnover measures, each setting a period’s flow against the average balance that produced it, so the answer is a count of times, and in that form a higher figure reads as faster. In banking it is one measure, noninterest expense less amortization of intangible assets set against net interest income plus noninterest income, where a lower figure reads as better, which is the opposite direction.

Neither sense is a line on the face of a statement. Ratios of this kind are calculated from information on financial statements rather than presented on them (SEC, Beginners’ Guide to Financial Statements), and no accounting standard fixes the family’s membership or its wording.

The Turnover Family

Every member is the same construction: a period’s flow on top, the average balance that carried it underneath, an answer stated in times. Several are also published in a days form, which restates that same count as a number of days, so the direction inverts and fewer days is the faster result.

Accounts receivable turnover divides net credit sales by average accounts receivable, and days sales outstanding is that same relationship counted in days.

Inventory turnover divides cost of goods sold by average inventory, taking cost rather than sales for the reason argued there, and days inventory outstanding is its days form.

AP turnover divides net credit purchases by average accounts payable, a numerator an outside reader has to build from a substitute, for the reason given there.

Asset turnover ratios take the whole asset base rather than one balance inside it, net sales over average total assets.

The Banking Sense

Here the term is not a family name. It is one figure, and the FDIC states it as noninterest expense less amortization of intangible assets as a percent of net interest income plus noninterest income, a measure of the proportion of net operating revenues absorbed by overhead expenses, so that a lower value indicates greater efficiency (FDIC Quarterly Banking Profile, Notes to Users, First Quarter 2026).

Two parts of that definition are easy to lose. The amortization of intangible assets comes out of the numerator, and the denominator is two revenue lines added together rather than one revenue caption.

Say a bank’s figures for one year are the ones below.

Net interest income                       60,000,000
Noninterest income                        20,000,000
Noninterest expense                       48,000,000
Amortization of intangible assets          2,000,000

efficiency ratio
  (48,000,000 - 2,000,000) / (60,000,000 + 20,000,000)  =  57.5%

same year, noninterest expense 4,000,000 lower
  (44,000,000 - 2,000,000) / (60,000,000 + 20,000,000)  =  52.5%

The second line is the same bank carrying less overhead against the same revenue, and the figure falls. That fall is the improvement, which is the reverse of a turnover ratio counted in times, where a better result is a larger number.

Reading a Published Figure

A figure published under this name is unreadable until the sense is named and its conventions travel with it: which figure went on top, whether the balance underneath was averaged, and on the banking measure whether the amortization came out. When two efficiency figures for one client will not reconcile, that is what to compare before the gap gets read as a change in performance.

What an Efficiency Ratio Is Not

Liquidity ratios ask whether near-term resources cover what falls due, read off one balance sheet at one date, with no flow term in them. Profitability divides a profit figure by a base, so it reports what the trading earned rather than what it took to earn it. An efficiency ratio answers neither question.

Common Questions

Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a trial task lets a firm grade a real block of its own close work before a client’s ratios are computed off it.