Profit per Employee is a measure of Net Income for the past twelve months (LTM) divided by the current number of
employees. Because labour needs differ across sectors, this ratio is often used to compare companies within the same industry.
A Business’s Financial Health: Revenue Per Employee
How does profit per employee work?
If a company’s capital remains constant, an increase in profit per employee typically indicates that its workforce is more productive and effective at what they do. Therefore, a company is essentially basing its growth on the caliber of its employees when it uses profit per employee as a relevant financial metric. This works best in fields where human capital is a crucial variable that affects a business’ capacity to maintain a high level of efficiency.
The following are the top two methods for raising the profit per employee ratio:
Calculating and raising the profit per employee can help the company’s management better understand and maintain its financial health as well as raise its market cap, which is likely the most useful measure of an organization’s size and significance in a market. This can broaden the company’s reach and reputation while also increasing its worth to potential investors.
What is profit per employee?
Calculating a company’s profit per employee, also known as net income per employee, is a way to determine how much profit each employee contributes over a specific amount of time. Most of the time, an organization will benefit from having a profit per employee ratio as high as possible because it typically indicates that its employees are well-trained, well-managed, and productive.
Several factors can influence an organizations profit per employee ratio. Some of the most often encountered are:
How to calculate profit per employee
The profit of an organization is divided by the total number of its employees over a certain period of time, which is typically the previous 12 months or the previous calendar year, to determine the profit per employee. The steps for calculating profit per employee are:
1. Determine the organizations total number of employees
Knowing the precise number of full-time employees, including all management positions, is the first step in calculating a company’s profit per employee. You can determine how many full-time employees are employed at that time or how many were employed on average over the course of the previous calendar year, depending on the time frame you choose for your calculation.
2. Calculate the organizations profit
Profit is calculated using the formula: Profit = Total Revenue – Total Expenses. You can calculate the profit from the previous 12 months or the profit at the end of the previous calendar year, depending on the time frame you choose.
3. Calculate the profit per employee ratio
You can determine the company’s profit per employee ratio now that you are aware of the number of employees and profit generated over a specific time period. Profit per Employee is calculated using the formula Profit/Total Employees.
Examples
Here are a few scenarios where it would be necessary to apply the profit per employee ratio:
Example 1
A business is attempting to gauge the output and performance of a typical employee. The calculation will be done by a financial analyst, who will use statistics from previous years. After reviewing the company’s annual report, the analyst determines that the total revenue for the year was $840 294 and the total expenses were $560 300. The company employed a total of 37 people by year’s end.
The report should conclude by stating that, in the previous year, the organization’s revenue per employee was $5,675 per employee.
Example 2
A business decides to use profit per employee as the primary metric for comparison when assessing how it stacks up against its two main rivals. They are aware that last year, with nine employees, they made a profit of $78,912 One of their main competitors has 12 employees and made $81,384 in profit last year, while the other has 34 employees and made $119,394 in profit during the same time period.
competitor number two employs more people even though it makes more money than the company in question. While the competitor’s profit per employee ratio will improve if they increase their profit while keeping the same number of employees, the company can increase its total profits by hiring more people who can produce high profit per employee numbers.
FAQ
What is the average profit per employee?
Actually, the average small business makes about $100,000 per employee. For larger companies, it’s usually closer to $200,000. Fortune 500 companies average $300,000 per employee. Oil companies generate over $2,000,000 in revenue per employee.
How do you calculate profit per employee?
Determine the profit per employee ratio Now that you are aware of the company’s employee count and overall profit, you can determine the profit per employee ratio. Profit per Employee is calculated using the formula Profit/Total Employees.
What is a good profit per employee ratio?
What constitutes a good revenue per employee benchmark? A good benchmark for revenue per employee ranges from $43,000 for businesses with annual revenues under $1 million to $230,000 for those with annual revenues of $50 million or more.
Is profit per employee a good metric?
The profitability of businesses in the same sector can be compared using the profit per employee ratio. Profit per employee isn’t a particularly useful metric when taken out of context.
