1. Operating Performance Ratios: Introduction
  2. Operating Performance Ratios: Fixed-Asset Turnover
  3. Operating Performance Ratios: Sales/Revenue Per Employee
  4. Operating Performance Ratios: Operating Cycle

By Richard Loth (Contact | Biography)

As a gauge of personnel productivity, this indicator simply measures the amount of dollar sales, or revenue, generated per employee. The higher the dollar figure the better. Here again, labor-intensive businesses (ex. mass market retailers) will be less productive in this metric than a high-tech, high product-value manufacturer.

Formula:

Components:

As of December 31, 2005, Zimmer Holdings generated almost $3.3 billion in sales with an average personnel complement for the year of approximately 6,600 employees. The sales, or revenue, figure is the numerator (income statement), and the average number of employees for the year is the denominator (annual report or Form 10-K).



Variations:
An earnings per employee ratio could also be calculated using net income (as opposed to net sales) in the numerator.

Commentary:
Industry and product-line characteristics will influence this indicator of employee productivity. Tracking this dollar figure historically and comparing it to peer-group companies will make this quantitative dollar amount more meaningful in an analytical sense.

For example, Zimmer Holdings' sales per employee figure of $497,878 for its 2005 fiscal year compares very favorably to the figure for two of its direct competitors - Biomet, Inc. (NYSE:BMET) and Stryker Corp. (NYSE:SYK). For their 2005 fiscal years, these companies had sales per employee figures of only $320,215 and $293,883, respectively.

The comparison of Microsoft (Nasdaq:MSFT) and Wal-Mart (WMT), two businesses in very different industries, illustrates how the sales per employee ratio can differ because of this circumstance. Microsoft relies on technology and brain power to drive its revenues, and needs a relatively small personnel complement to accomplish this. On the other hand, a mega-retailer like Wal-Mart is a very labor-intensive operation requiring a large number of employees. These companies' respective sales per employee ratios in 2005 were $670,939 and $172,470, which clearly reflect their industry differences when it comes to personnel requirements.

The sales per employee metric can be a good measure of personnel productivity, with its greatest use being the comparison of industry competitors and the historical performance of the company.


Operating Performance Ratios: Operating Cycle
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