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The efficiency ratio indicates the expenses as a percentage of revenue, with a few variations â it is essentially how much a corporation or individual spends to make a dollar; entities are supposed to attempt minimizing efficiency ratios. The concept typically applies to banks. It relates to operating leverage, which measures the ratio between fixed costs and variable costs.
Compare the expense ratio to other companies or previous reports. Once the expense ratio is calculated, it can be used to evaluate the financial health of an organization. If the expense ratio is increasing over time, the company may be losing its pricing power or not managing its costs effectively.