Banks use the efficiency ratio to measure how well they control costs. It divides non-interest expenses by net interest income plus non-interest income. A lower number is better. An efficiency ratio of 50 percent means the bank spends 50 cents to earn a dollar of revenue.

The ratio is most common in banking, but the concept applies elsewhere. In general terms, an efficiency ratio measures how well a company uses its assets and liabilities to generate income. A manufacturing company might track revenue per employee. A retailer might track sales per square foot. Each is a version of the same question: how much output are you getting for your input?

Efficiency ratios are useful for comparison. A bank with a ratio of 45 percent is leaner than one at 70 percent. But context matters. A bank investing heavily in new technology may have a temporarily high ratio. A bank cutting costs too aggressively may damage customer service. The ratio is a snapshot, not a verdict. It tells you where to look, not what to conclude.