Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Revenue Per Employee

What it is:

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.

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...