Revenue per employee measures the average revenue generated by each employee of a company.

How It Works/Example: Revenue per employee is calculated by dividing a firm's revenue by its total number of workers (Revenue/Number of Employees). Let's take a closer look some sample figures from Company XYZ: 2005 Revenue: $50,000,000 Employees: 312 By plugging the information provided above into the above formula, we can calculate the firm's revenue per employee as follows: $50,000,000/312 = $160,256.41 Therefore, every employee at Company XYZ contributed approximately $160,256 in revenue for 2005. Why It Matters: Revenue per employee is a measure of how efficiently a particular company is utilizing its employees. In general, relatively high revenue per employee is a positive sign that suggests the company is finding ways to squeeze more sales (revenue) out of each of its workers. Labor needs vary from industry to industry, and labor-intensive companies will typically have lower revenue per employee ratios than companies that require less labor. Hence, a comparison of revenue per employee is generally most meaningful among companies within the same industry, and the definition of a "high" or "low" ratio should

be made with this in mind. Additionally, a company's age can influence its revenue per employee ratio. Young companies may be in the process of escalating their hiring activity to fill key positions, yet their revenues may still be relatively small. Such firms tend to have lower revenue per employee ratios than more established companies that can leverage those same key positions over a larger revenue base. In the case of Company XYZ, the $160,256 figure we calculated above is of little analytical value when examined by itself. They key is to see how this figure compares against historical readings: Are the firm's revenues per employee rising or falling? Investors should also see how well the ratio stacks up against industry peers. Growing companies will inevitably need to take on additional help at some point. Ideally, though, management will be able to grow its revenues at a faster rate than its labor costs; this is often reflected in steadily rising revenue per employee figures. Ultimately, increased efficiency on this measure should lead to expanding margins and improved profitability.

Sales/Revenue Per Employee

By Richard Loth (Contact | Biography) As a gauge of personnel productivity, this indicator simply measures the amount of dollar sales, or revenue, generated per employee. The higher the dollar figure the better. Here again, labor-intensive businesses (ex. mass market retailers) will be less productive in this metric than a high-tech, high product-value manufacturer. Formula:

Components:

As of December 31, 2005, Zimmer Holdings generated almost $3.3 billion in sales with an average personnel complement for the year of approximately 6,600 employees. The sales, or revenue, figure is the numerator (income statement), and the average number of employees for the year is the denominator (annual report or Form 10-K). Variations: An earnings per employee ratio could also be calculated using net income (as opposed to net sales) in the numerator. Commentary: Industry and product-line characteristics will influence this indicator of employee productivity. Tracking this dollar figure historically and comparing it to peer-group companies will make this quantitative dollar amount more meaningful in an analytical sense.

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For example, Zimmer Holdings' sales per employee figure of $497,878 for its 2005 fiscal year compares very favorably to the figure for two of its direct competitors - Biomet, Inc. (NYSE:BMET) and Stryker Corp. (NYSE:SYK). For their 2005 fiscal years, these companies had sales per employee figures of only $320,215 and $293,883, respectively. The comparison of Microsoft (Nasdaq:MSFT) and Wal-Mart (WMT), two businesses in very different industries, illustrates how the sales per employee ratio can differ because of this circumstance. Microsoft relies on technology and brain power to drive its revenues, and needs a relatively small personnel complement to accomplish this. On the other hand, a mega-retailer like Wal-Mart is a very labor-intensive operation requiring a large number of employees. These companies' respective sales per employee ratios in 2005 were $670,939 and $172,470, which clearly reflect their industry differences when it comes to personnel requirements. The sales per employee metric can be a good measure of personnel productivity, with its greatest use being the comparison of industry competitors and the historical performance of the company.

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