Net Income per Employee
Net Income per Employee is the company’s net income divided by the number of employees. Earnings per employee is an important ratio that roughly measures how much money each employee makes for the company.
Net Income per Employee is an efficiency ratio used to determine the income generated per individual working in a company.
The ratio of income per employee is important to determine the efficiency and productivity of the average employee of a company.
This is to find out business performance! In general, the higher the number, the more efficiently the company uses employees; but the numbers are only directly compared when companies compare very similar traits.
There are no rules about what constitutes a good level of earnings per employee, or a bad rate.
Formula of Net Income per Employee
The ratio formula is as follows:
Net profit per employee = net profit / current number of employees
Note: A variation of the above formula that analysts often use is to use net income in the numerator instead of revenue.
The Importance to calculate Net Income per Employee
For many companies, their biggest expense is salaries and benefits for employees.
In addition, it is the workforce that drives business success. Therefore, companies usually want a high Net Profit/Employee to offset the costs paid to employees.
Generally, a higher Net Income per Employee usually indicates a more productive and efficient company. The ratio of earnings per employee is very useful for analyzing companies operating in the service industry.
Read also: Free Cash Flow (FCF) | Explanation, Method of Analysis, Examples, Questions, Answers
It is important to note that this metric should always be used in conjunction with other financial ratios to analyze a particular company. In addition, the ratio should only be compared with other companies operating in the same or similar industry, as each industry faces a different cost structure.
For example, labor-intensive companies will typically report lower earnings per employee, compared to technology companies.
Questions and Answers
Let’s take a closer look at some sample images from Company XYZ: 2019 Revenue: $50,000,000.
Employees: 312. Calculate the net profit/employees!
Answer:
By plugging the information given above into the above formula, we can calculate the company’s revenue per employee as follows:
$50,000,000/312 = $160,256.41
Therefore, each employee at Company XYZ contributed approximately $160,256 in revenue for 2019.
John is an equity analyst who does the analysis at Google.com, John’s manager asked him to analyze the average productivity of employees at Facebook and instructed him to determine the earnings per Google employee as of December 31, 2018.
After looking through Google.com’s annual report, John found that the number of employees at Google.com was 35,587 people and the company reported revenues of US$ 55,838 million. Determine how much net profit / employees!
Answer:
Net Profit per Employee = US$ 55 838 million / 35 587 = US$1.5691 million per employee
John reported to his manager that Google’s revenue per employee was $1.5691 million per employee.
Sources: PinterPandai, Klip Folio, Corporate Finance Institute, Investopedia
Photo credit: nattanan23 / Pixabay
