What Is Revenue per Employee?
Revenue per employee—calculated as a company's total revenue divided by its current number of employees—is an important ratio that roughly measures how much money each employee generates for the firm. The revenue-per-employee ratio is most useful when looking at historical changes in a company's own ratio or when comparing it against that of other companies in the same industry as part of a fundamental analysis.
- 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 particular firm utilizes its employees. Ideally, a company wants the highest ratio of revenue per employee possible because a higher ratio indicates greater productivity. Revenue per employee also suggests that a company is using its resources—in this case, its investment in human capital—wisely by developing workers who are very productive. Companies with high revenue-per-employee ratios are often profitable.
Some analysts use a variation of the revenue per employee ratio. In this ratio, they replace revenue with net income. A ratio similar to revenue per employee is sales per employee, which is calculated by dividing a company's annual sales by its total employees.
Factors Affecting the Ratio of Revenue per Employee
The Company's Industry
Because labor demand varies from industry to industry, it is most meaningful to compare a business's revenue per employee with that of other companies in its industry—especially with its direct competitors. This ratio has little value out of context.
Traditional banking, for example, requires many employees to staff brick-and-mortar locations and answer customer questions. This contrasts with online banks, which conduct business on the Internet and have no need to staff physical locations with employees. Thus, a banker would want to compare its company's revenue per employee ratio with that of similar types of banking institutions. Companies in labor-intensive industries like agriculture and hospitality typically have lower revenue-per-employee ratios than companies that require less labor.
Revenue per employee is affected by a company’s employee turnover rate, where turnover is defined as the percentage of the total workforce that leaves voluntarily (or is fired) each year and must be replaced. Turnover is different from employee attrition, which refers to workers who retire or whose jobs are eliminated because of downsizing.
Employee turnover typically requires a company to interview, hire, and train new workers. During these onboarding processes, companies frequently become less productive because existing workers may need to mentor a new employee and share part of the workload.
The Age of the Company
Startup companies that are hiring to fill key positions might still have relatively small revenue. Such firms tend to have lower revenue-per-employee ratios than more established companies that can leverage hiring for those same key positions over a larger revenue base.
If a growing company needs to take on more help, management would ideally be able to grow its revenue at a faster rate than its labor costs, which often is reflected in steadily rising revenue-per-employee ratios. Ultimately, increased efficiency in managing its revenue per employee should lead to a company's expanding margins and improved profitability.
Investors interested in calculating a company's revenue per employee can find the required revenue and employee numbers in the company's financial statements and annual reports. The ratio itself is easy to calculate and comparing revenue per employee between different companies is a fairly straightforward process. In general, companies with higher revenue-per-employee numbers operate streamlined and efficient organizations, have lower overhead costs, and are more productive than their competitors.
There are several other ratios an investor should also consider when analyzing a company as a potential investment. Investors should review a company's profitability ratios, such as profit margin, return on assets (ROA), and return on equity (ROE).