What Is Revenue per Employee?
Let me explain revenue per employee to you—it's a financial efficiency metric that estimates the average amount of revenue generated by each full-time equivalent employee in an organization.
You calculate it as a company's total revenue divided by its current number of employees, giving a ratio that roughly shows how much money each employee brings in for the firm. I find this ratio most useful when you look at historical changes in a company's own figures or compare it to others in the same industry as part of your fundamental analysis.
Key Takeaways
- Revenue per employee is an important ratio that roughly measures how much money each employee generates for the company.
- To calculate a company's revenue per employee, divide the company's total revenue by its current number of employees.
- Ideally, a company wants the highest ratio of revenue per employee possible because a higher ratio indicates greater productivity, which often translates to more profits for the company.
- For the revenue-per-employee ratio to be useful, it should be used when comparing and analyzing companies in the same industry.
- Other factors that can impact the revenue-per-employee ratio include employee turnover and the age of the company.
How Revenue per Employee Works
Revenue per employee is a meaningful analytical tool because it measures how efficiently a firm utilizes its employees. You want the highest ratio possible, as it indicates greater productivity. This also suggests the company is using its resources—its investment in human capital—wisely by developing highly productive workers. Companies with high ratios are often profitable.
Some analysts use a variation where they replace revenue with net income. Another similar ratio is sales per employee, calculated by dividing annual sales by total employees.
Factors Affecting the Ratio of Revenue per Employee
Several factors influence this ratio, and I'll break them down for you.
The Company's Industry
Because labor demand varies by industry, compare a business's revenue per employee with others in its industry, especially direct competitors. This ratio has little value without context. For instance, traditional banking needs many employees for physical locations, unlike online banks. Companies in labor-intensive industries like agriculture or hospitality typically have lower ratios than those requiring less labor.
Employee Turnover
Revenue per employee is affected by employee turnover rate, which is the percentage of the workforce that leaves voluntarily or is fired each year and must be replaced. This differs from attrition, like retirements or downsizing. Turnover requires interviewing, hiring, and training new workers, often reducing productivity as existing staff mentor them. Expenses rise with onboarding, like training seminars, even as productivity dips.
The Age of the Company
Startups hiring for key positions might have small revenue, leading to lower ratios than established companies that leverage hiring over a larger revenue base. If a growing company adds help, management should grow revenue faster than labor costs, reflected in rising ratios. Ultimately, better efficiency here leads to expanding margins and improved profitability.
Special Considerations
If you're an investor calculating this, find revenue and employee numbers in financial statements and annual reports. The ratio is easy to compute, and comparing between companies is straightforward. Generally, higher ratios mean streamlined operations, lower overhead, and more productivity than competitors. You should also consider other ratios like profit margin, return on assets, and return on equity when analyzing a potential investment.
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