An efficiency ratio used to determine the revenue generated per employee
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Revenue per employee is an efficiency ratio used to determine the revenue generated per individual working at a company. The revenue per employee ratio is important for determining the efficiency and productivity of the average employee of a company.
Formula for Revenue Per Employee
The formula for the ratio is as follows:
Note: A variation to the formula above often used by analysts is to use net income in the numerator, as opposed to revenue.
Example 1: Facebook Inc.
John is an equity analyst conducting analysis on Facebook Inc. John’s manager asks him to analyze the productivity of an average employee at Facebook and instructs him to determine the revenue per employee for Facebook as of December 31, 2018.
Scanning through Facebook’s annual report, John finds that the number of employees at Facebook is 35,587, and the company reports revenues of $55,838 million. He determines the RPE of Facebook as follows:
John reports to his manager that Facebook’s revenue per employee is $1.5691 million per employee.
Example 2: Hypothetical Competitor Analysis
Given only the revenue and number of employees of different companies operating in the same industry, use the revenue per employee ratio to find which company is more productive:
From the table above, and with only revenue and employee figures available, we conclude that Company B is the most efficiently productive company, since its RPE is $31,395, as opposed to $14,857 and $8,573 for Company A and Company C, respectively. Although Company C generates revenue in excess of $3 million, it employs a significantly higher number of employees to generate said revenue.
Example 3: Company Profitability
Recall Example 2 but consider the additional fact patterns listed below. Which company is generating a profit?
Assume the only expenses faced by each company are salaries.
A salary of $15,000 is paid to each employee in the industry, regardless of which company they are employed by.
With a salary of $15,000 per employee, we can conclude that Company B is the only one that is turning a profit. This is consistent with our conclusion in Example 2 that Company B is the most efficiently productive.
Importance of Revenue Per Employee
For many companies, their largest expenses are salaries and benefits for employees. In addition, the workforce is what drives business success. Therefore, companies typically want a high RPE to offset the expenses paid to employees. Generally, a higher RPE typically indicates a more productive and efficient company. The revenue per employee ratio is particularly useful for analyzing companies that operate in service industries.
It is important to note that this metric should always be used in conjunction with other financial ratios to analyze a given firm. Additionally, the ratio should only be compared with that of other companies operating in the same or a similar industry, as each industry faces a different cost structure. For example, a labor-intensive company will typically report a lower revenue per employee, as opposed to a technology company.
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