Sales per Employee Ratio
The sales per employee ratio is an asset utilization metric that allows analysts to understand how efficiently a company uses its staff to generate revenues. Sales per employee is a popular industry measure; oftentimes used by both the investor-analyst and company management to benchmark performance.
Sales per Employee Ratio = Net Sales / Full Time Equivalents
- Net Sales = Gross Sales - Returns
- Full Time Equivalent: commonly abbreviated as FTE, the number of full time equivalents is calculated as the annual straight time hours worked by employees divided by 2,080. A part time employee that works 20 hours per week would work 52 x 20, or 1,040 hours per year, while a full time employee would work 52 x 40, or 2,080. Overtime hours are usually not included in the calculation of an FTE.
Also known as sales per person, the sales per employee ratio provides the analyst-investor with insights into how efficiently a company uses its employees to generate revenues. The metric is oftentimes used by company management, as well as investors, to benchmark a company's performance against industry peers. Higher ratios indicate more revenue generated per employee, which is desirable.
Sales per employee is considered a very strong indicator of performance when evaluating companies in the services sector of the economy such as financial institutions, the banking industry, producers of software, as well as retailers.
Manufactures can displace labor by automating production with capital equipment, making benchmarking more difficult. In the same way, companies that engage in significant outsourcing activities can have unusually high sales per employee ratios.
Companies in the early stages of their development may be less efficient in their operations than more mature companies. Tracking this metric over time allows the analyst-investor to understand if the company is becoming more efficient as it grows.
The process improvement team at Company A wanted to understand if their recommendations were resulting in an increase in the company's sales to employee ratio. Company A had been increasing sales over the last four years, and the process improvement team was working hard to ensure employees were working efficiently.
The table below illustrates the sales per employee trend for Company A over the last four years:
As the above table indicates, the sales per employee ratio for Company A has been increasing over time, which aligns well with the process improvements they've instituted.