Operating Performance Ratios: Sales/Revenue Per Employee

While fixed-asset turnover ratio is a measure of a company’s use of its fixed assets as a means of generating sales, sales/revenue per employee examines the business benefit on the level of individual personnel. This is not to say that this ratio should be (or is) used as a way of determining the performance of individual employees. Rather, it still reflects the larger decisions of a company’s management. However, it is calculated by breaking down sales or revenue that the company earns as compared with the number of employees working for at company.

As in fixed-asset turnover, certain types of companies are naturally inclined to enjoy higher or lower ratios. The higher the ratio is, the better the company in question is at generating revenue given the number of employees that it maintains. Labor-intensive businesses like mass market retailers tend to be less productive according to this metric as compared with high-tech, high-product-value manufacturers.

Formula

Here is the formula for calculating sales/revenue per employee:

Sales/Revenue Per Employee = Revenue/Number of Employees (Average)

For a hypothetical company generating $2 billion in sales and employing an average of 5,000 employees for the same period, the sales/revenue per employee calculation would thus be as follows:

$2,000,000,000/5,000 = $400,000

To determine the figures to input for any given company, once again it is helpful to look to the company’s financials. The sales or revenue figure can be surmised from the income statement, while the average number of employees for that period is available in the annual report or Form 10-K.

Variations

It is also possible to determine an earnings per employee ratio by using net income instead of net sales or revenue. (See What is the difference between earnings and revenue? for additional information.)

Like the other operating performance ratios a single calculation of sales/revenue per employee is far less useful than several ratios which can be compared against one another. Look to how a company’s sales/revenue per employee changes from year to year, for example, or how it stacks up against ratios for similar companies or competitors.

It is less useful to compare companies in very different sectors or industries using this performance metric. Take, for example, a comparison of Microsoft (MSFT) and Wal-Mart (WMT), two major companies in different industries. Microsoft relies on technology and innovation to drive revenues, requiring a relatively small personnel complement in order to accomplish these goals. A massive retail store like Wal-Mart, on the other hand, is quite labor-intensive and employees many more workers. Thus, Microsoft may be likely to have a sales per employee ratio that is significantly higher than that of Wal-Mart. This is largely a reflection of the fundamental differences in how these companies operate.

Used appropriately, sales or revenue per employee can be a useful metric to assess personnel productivity for a company. It is best used as a tool for comparing industry competitors or a company’s performance across many years.