What is revenue per employee? Example and How it’s Used
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Summary:
One important way to measure how well a company uses its employees is to look at their revenue per employee. This ratio, which is calculated by dividing total revenue by workforce size, indicates resource utilization and productivity. Profitability is often higher when there is more income per employee. To understand this metric, you need to look at business standards, turnover rates, and the age of the company. Along with other financial ratios, income per employee can help investors figure out how well a business runs and whether it’s a good investment.
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What is revenue per employee?
Revenue per employee is the total amount of money made in the last twelve months (LTM) divided by the number of full-time workers who work there now. This ratio, which is also called the “Revenue to Employee Ratio,” is one of the most useful and is often used to compare businesses in the same field.
Formula for revenue per employee
ƒ Sum (Revenue LTM) / Count (Full-Time Equivalents)
How to figure out the income per worker
If a company has 50 employees and makes $7.5 million a year, their revenue per employee is $150,000 a year.
Based on the same amount of income, their income per employee ratio will be $100,000 per year if they start working on a new product line and hire 25 more people.
How does revenue per employee work?
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 differs by industry, it’s most meaningful to compare a business’s revenue per employee to that of its industry peers, especially its direct competitors. Without context, this ratio is useless.
Because labor demand differs by industry, it’s most meaningful to compare a business’s revenue per employee to that of its industry peers, especially its direct competitors. Without context, this ratio is useless.
Traditional banking employs several people to address consumer questions at physical locations. Online banks don’t need workers because they operate online. Thus, a banker would compare its revenue per employee ratio to similar banks. Agriculture and hospitality companies have lower revenue-per-employee ratios than others.
Employee turnover
Employee turnover—the percentage of employees who leave voluntarily or are fired each year and must be replaced—affects company revenue per employee. Turnover contrasts with retirement and downsizing, which are forms of workforce attrition.
Employee turnover—the percentage of employees who leave voluntarily or are fired each year and must be replaced—affects company revenue per employee. Turnover contrasts with retirement and downsizing, which are forms of workforce attrition.
Due to staff turnover, companies must interview, hire, and train new hires. Onboarding might reduce productivity since existing employees must mentor new staff and share responsibility. Onboarding expenses rise when companies hire outside specialists, pay for special courses or training seminars, and pay less productive workers to work extra.
The age of the company
Startups looking for important personnel may have low revenue. Such enterprises have lower revenue-per-employee ratios than larger corporations that may hire for important positions across a larger revenue base.
Startups looking for important personnel may have low revenue. Such enterprises have lower revenue-per-employee ratios than larger corporations that may hire for important positions across a larger revenue base.
Rising revenue-per-employee ratios demonstrate that management should be able to generate revenue more quickly than labor costs in a growing company. A company’s margins and profitability should increase with better revenue per employee.
Frequently asked questions
What is revenue per employee?
Revenue per employee is a ratio that measures how much money each employee generates for a company. It is calculated by dividing the total revenue of a company by the number of employees.
Why is revenue per employee important?
Revenue per employee is important because it indicates how efficiently a company utilizes its workforce. A higher revenue per employee generally signifies greater productivity and profitability.
How is revenue per employee calculated?
To calculate revenue per employee, divide a company’s total revenue by its current number of employees.
Key takeaways
- Revenue per employee measures how efficiently a company utilizes its workforce.
- A higher ratio indicates greater productivity and profitability.
- Comparing revenue per employee among companies in the same industry is most meaningful.
- Employee turnover and company age can impact revenue per employee.
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