What is Revenue Per Employee?
Revenue per employee is an efficiency ratio used to determine the revenue generated per individual working at a certain company. The revenue per employee ratio is important for determining the efficiency and productivity of an average employee in a company.
Formula for Revenue Per Employee
The formula for the revenue per employee ratio is as follows:
Note: A variation to the formula above often used by analysts would be to use net income in the numerator as opposed to revenue.
Examples of Revenue Per Employee
Example 1: Facebook Inc.
John is an equity analyst conducting analysis on Facebook Inc. John’s manager asks him to analyze the efficiency 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 with the company reporting revenues of $55,838 million. He determines the revenue per employee of Facebook as follows:
John concludes and 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 each company 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 productive company since its revenue per employee is $31,395 as opposed to $14,857 and $8,573 of Company A and Company C, respectively. Although Company C generates revenue in excess of $3 million, it employs a significant 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 at.
With a salary of $15,000 per employee, we can conclude that Company B is the only one that is turning a profit. It is consistent with our conclusion in Example 2 that Company B is the most 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 revenue per employee to offset the expenses paid to employees. Generally, a higher revenue per employee typically indicates a more productive and efficient company. The revenue per employee ratio is heavily used and looked at for companies that operate in service industries.
It is important to note that revenue per employee should always be used in conjunction with other financial ratios to analyze a given firm. Additionally, the per employee revenue ratio should only be compared with other companies operating in the same or in a similar industry as each industry faces a different cost structure. For example, a labor-intensive company typically report a lower revenue per employee as opposed to a technology company.
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