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Purpose and benefits

For this calculation and related ratios, the lower the numbers the better. Often identified with banking and financial sectors, the efficiency ratio indicates a management’s ability to keep overhead costs low. This measurement also is 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.

In some industries, the efficiency ratio is called the overheads burden: overheads as a percentage of sales.