Get the Lowdown on Revenue per Employee
Employee-Related Income Measurement: Understanding Its Concept and Elements Influencing It
Wanna know how much cash each worker brings to the table? That's where revenue per employee comes in. It's a financial efficiency metric that's straight-up the average revenue produced by each full-time employee at your organization.
What's the deal with Revenue per Employee?
The revenue per employee ratio (RE per E) is calculated by splitting a company's total revenue by the number of employees works for 'em. This ratio gives you a rough idea of how much each employee generates for the firm. It's most useful in assessing the company's historical changes or when comparing it to other industry peers.
Key Points
- RE per E is an important ratio that gives a rough estimate of the revenue per employee.
- To calculate a company's RE per E, divide the total revenue by the number of employees.
- Aiming for a high RE per E ratio is a good thing because it often means higher productivity and profits for the company.
- The RE per E ratio should be used when comparing and analyzing similar industries.
- Factors like employee turnover and company age can affect the RE per E ratio.
Here's How it WORKS
RE per E helps determine how efficiently a company leverages its workforce. A high RE per E ratio suggests greater productivity and smart resource management—the firm is investing in human capital wisely by developing productive workers[1].
Some analysts replace revenue with net income in this ratio or even use sales per employee, calculated by dividing annual sales by the total employee count.
What Affects the RE per E Ratio
Industry Matters
Labor demand differs among industries, so comparing a company's RE per E to others in its industry is crucial. For instance, traditional banking often requires a lot more on-site staff than online banking, affecting their respective RE per E ratios[1].
Turnover Complications
Employee turnover affects RE per E by causing costs and productivity drops. When employees leave, the company needs to spend resources on hiring and training new employees[1]. These new hires often take time to match the productivity of long-term employees, temporarily reducing overall efficiency and revenue per employee.
Company Age
Within startup companies, hiring key positions might lower their revenue per employee ratio due to smaller revenues. On the other hand, more established companies can have higher RE per E ratios due to the ability to leverage past hires across a larger revenue base[1].
If a growing company needs to take on more help, management would ideally grow the revenue at a faster rate than labor costs, leading to improved profitability.
Special Considerations
To compute a company's RE per E, dig into the financial statements and annual reports for revenue and employee numbers. Comparing RE per E between various companies is fairly straightforward. Companies with a higher RE per E ratio often have streamlined, lean operations and lower overhead costs compared to their competitors[1].
In addition to RE per E, consider other profitability ratios when analyzing a company as an investment. Some good ones include profit margin, return on assets (ROA), and return on equity (ROE)[1].
- With the right management, a growing business could improve its profitability by increasing revenue faster than adding labor costs, thereby enhancing its revenue per employee (RE per E) ratio.
- Analysts might sometimes replace revenue in the RE per E ratio with net income or use sales per employee instead, which is calculated by dividing annual sales by the total employee count.
- The decision to invest in a business could be informed by not only the RE per E ratio but also other profitability ratios such as profit margin, return on assets (ROA), and return on equity (ROE), as these ratios provide a comprehensive financial overview of the organization.
