The Efficiency Ratio is a commonly used financial metric that evaluates how well an organization utilizes its resources, such as assets, labor, and time, to generate revenue or deliver services. This ratio is typically expressed as a percentage. For financial institutions, it often measures their operating costs relative to their income, indicating their operational efficiency.

For example, an Efficiency Ratio of 50% means that the company spends $0.50 in operating costs for every $1 of revenue earned. A lower Efficiency Ratio indicates better performance, as the organization uses less to produce more, which reflects cost-effectiveness and productivity.

In practice, the Efficiency Ratio can highlight areas for improvement in financial operations, asset utilization, or production processes. Businesses use this metric in decision-making to identify inefficient areas and strategize for optimizing resource allocation. Calculating this ratio regularly can help maintain sustainable growth while minimizing wastage.