Reviewing the latest annual report from Andrews Sykes (ASY) reminded me about monitoring revenue per employee:
“ASY is one of the few quoted companies to use revenue per employee as a KPI. More companies should really use it, as employee talent can increasingly be a more lucrative resource than traditional tangible assets.”
Rising employee productivity can signal potential ‘scalable’ businesses, where additional sales may not require as much additional people, equipment, etc, which then can lead to improved margins and faster earnings growth.
There seems to be some loose correlation between improving revenue per employee and long-term share-price performance, at least within my portfolio.
The table below lists my 11 shares and their respective revenue per employee figures for the last 10 financial years:
(SUS: Advantage Finance, 2012-2021)
(SYS1: 2016 year-end change)
And this table lists the percentage change to revenue per employee and the share price:
|10-year||Revenue/employee change||Share price change|
The five shares with the best revenue per employee improvements also displayed the best five share-price gains over the same ten years.
Among the other six shares, a clear correlation does not seem to exist. M Winkworth (WINK) for instance has seen its shares more than double while its revenue per employee has dropped 51%. So other factors beyond employee productivity can come into play.
Still, companies exhibiting improving revenue per employee could be worth investigating. With hindsight, you could have spotted the improving trend at Bioventix (BVXP), Tristel (TSTL), FW Thorpe (TFW) and perhaps S&U (SUS) and Mountview Estates (MTVW) during 2013-2015…
…and then enjoyed decent gains during the following years.
Does anybody else monitor revenue per employee? I do feel it can be a leading indicator for companies starting to enjoy more attractive economics, and positive trends may emerge earlier than for conventional ratios such as return on equity.