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Employee ratios

In this blog I will introduce five employee ratios and provide comments on each one. I will then attach a table that will show the results using data taken from the Polly Ester case study and conclude by giving an interpretation of each ratio.

Employee ratios must rank amongst the easiest of all ratios to calculate and interpret. Many apparently successful companies have used employee ratios to manage their business. This can lead to a number of unsatisfactory decisions, e.g. increasing the number of consultants since they do not appear on the denominator of the ratio, but they do cost more than a comparable full-time employee.

The only word of caution when using these types of ratios is to ensure that the number of employees shown in the denominator of the ratio is expressed in terms of full-time equivalents. Apart from that, you simply pick a figure, divide it by the number of employees and you have a ratio.

In the Table below we show examples of five employee based ratios. These ratios are selected in order to verify our analysis so far.

The first two ratios focus on the trading activity, i.e. revenues per employee and profit per employee. Ideally, we would want to see both ratios increasing at a steady rate. For example, as revenues increased we would expect an increase in the number of employees. Similarly, given an increase in revenues per employee year-on-year, we would expect to see a corresponding increase in profit per employee – or slightly better.

The next two ratios provide a view to the expansion of a business. Non-current assets per employee shows whether or not a company is expanding through the purchase of non-current assets (e.g. purchase of new equipment), or whether it is expanding through the use of more labour (not the favoured approach these days). The second ratio shows the expansion of borrowings and can be viewed as a simple gearing ratio. It also shows whether an expansion in non-current assets is being financed through borrowing.

The last ratio, staff costs per employee highlights one of the major costs in most companies. For this ratio we would expect to see a gradual increase perhaps in line with inflation.

Finally, do be aware that the acquisition or disposal of parts of a business can have a substantial effect on employee ratios. For example, if a company made a major acquisition of a high tech business, we would expect staff costs per employee to increase in the year of acquisition and beyond.

Revenues per employee89,17787,081102,006112,012
Profit per employee11,7159,975,8,185–598
Non-current assets per employee29,89730,35932,22030,508
Borrowings per employee8,62817,63220,31333,459
Staff costs per employee27,19927,30129,44031,959

Employee ratios

In the Table above we can see that the employee ratios are broadly in line with the analysis and interpretation performed so far.

Here we can see that the ratio of revenues per employee has increased, though profit per employee has reduced. Action to increase profit per employee would include, an increase in the selling price and/or a reduction in costs, e.g. a reduction in the cost of sales and/or distribution, selling and administration costs.

The ratio of non-current assets per employee shows an increase in the first three years followed by a decrease in the final year. The decrease in the final year might be caused by the disposal of Green and Gillies, with the non-current assets of that company now removed along with its employees, combined with an overall increase in employees. In this case, the ratio should have remained constant. It failed to do so because the number of employees actually increased. We find that there was a modest increase in non-current assets from £239.2 to £242.4 million, with a substantial increase in the number of employees 7,424 to 7,944.

The final ratio shows increases in staff costs per employee including inflation. Taken together with the increase in the number of employees for the period 2011/12 produces additional staff costs of £35.3 million.

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