Profit per Person (FTE)

Definition

The term profit per person refers to a metric that evaluates the efficient use of personnel. Profit per person is particularly useful for companies that have a relatively high proportion of labor expenses.

Calculation

Profit per Person = Net Income / Full Time Equivalents

Where:

  • Net income is equal to sales revenues minus all expenses, including depreciation, interest, and income taxes.
  • Full Time Equivalents is equal to the equivalent number of persons working full time jobs in a company. For example, two employees working 20 hours per week would be equal to one full time equivalent working 40 hours per week.

Explanation

Operating performance measures allow the investor-analyst to understand how well a company is performing with respect to sales, margins, and profits. One of the ways to measure the effectiveness of a company's core business is by calculating their profit per person.

Also referred to as profit per FTE, profit per person is a useful benchmarking metric for companies that have relatively high labor costs. For example, the profitability of a company in the services industry is directly related to the efficient and effective use of personnel. This metric is more indicative of performance than measures such as sales per person, since it not only considers sales revenues generated by personnel, but also their ability to turn those sales into profits. When calculating this metric, all personnel should be considered, including full and part time employees, contractors and outside services.

Example

Company ABC's chief operating officer wanted to better understand the effectiveness of the company's labor pool by computing their profit per person over time. The following rules were established for this metric:

  • Each full-time employee is equal to one FTE
  • Two part-time employees are equal to one FTE
  • The total contractor hours billed each month is divided by 168 to determine the total number of contractor FTEs
  • All the monthly hours for all other outside service is divided by 168 to determine the total number of outside services FTEs

Related Terms

fixed charge coverage, cash flow return on revenues, quality of earnings ratio