The Importance of the Sales per Employee Indicator

By Alan Fleisig

How many home improvement store employees does it take to screw in a light bulb?

This may seem like the setup for a silly joke. But if you were considering making an investment in a company in the home improvement retail sector, it is a completely serious consideration.

Sales per employee (“SPE”) – dividing a company’s net sales by the number of its full-time equivalent employees – provides insight into a company’s operating efficiency. Generally speaking, if the Sales per Employee indicator rises over time, that is a good sign. As in all financial metrics, dramatic spikes up or down should raise a flag, and you may have to do more research to determine what caused the spike. Dramatic upward spikes, for instance, might be a sign that a company has a terrific new product that is selling very well, but it might also suggest a company has had recent, large-scale layoffs.

The Sales per Employee indicator is most useful for comparing companies within a similar industry, or within a specific sector of an industry. Service companies, manufacturing companies, and retailers, for instance, generate such different results that it is not particularly useful to compare between them.

Careful use of the Sales per Employee metric can reveal a great deal about the management of a company that you might not learn from other financial measures. How much of a premium are customers willing to pay for a company’s products, how well does the company manage personnel expenses, and perhaps most important of all, how good is management’s recruiting and hiring practices? These are some of the questions that only measuring a company’s sales per employee can answer.

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