This page is quite old hence its rather spartan appearance.
Why not check out our Latest Stories page for our newest articles or search our site for anything.
QUALIPORT
By
Carburton Street, London -- It is often said that a company's greatest asset is its staff. But as a shareholder, how can you tell if the employees are actually pulling their weight? And how can you determine whether a company is reliant on its staff for success rather than some other asset? Financial notes To answer those questions, investors have to look in the relevant company's annual report. Within the notes at the back, there will be details of the number of workers employed during the financial year and their total remuneration. Those figures, past and present, coupled with the historic performance of the company can help pinpoint the efficiency of the employees. Take DFS Furniture (LSE: DFS). It's annual report for 2001 contained these details:Profit and loss account
2001 2000
(£000) (£000)
Turnover 401,940 357,318
Employment costs of all employees (including directors):
2001 2000
(£000) (£000)
Wages and salaries 37,163 30,120
Social security costs 3,686 3,149
Other pension costs 1,014 738
Total 41,863 34,007
Number of people employed (including directors):
2001 2000
Production 463 425
Warehouse and transport 423 345
Selling and administration 869 706
Total 1,755 1,476
Key ratios
The key ratios to be derived from the above numbers are:
* Staff productivity (sales per employee);
* The average employee cost, and;
* Staff costs as a proportion of sales.
For DFS, the figures are:
* £229,026 (£401.94m / 1,755);
* £23,854 (£41.863m / 1,755), and;
* 10.42% (£41.863m / £401.94m)
Taken over several years, here's how DFS measures up:
Year to Sales per Average employee Employee costs/
July Employee cost Sales
(£) (£) (%)
1994 200,132 15,936 7.96
1995 209,137 17,092 8.17
1996 231,826 18,089 7.80
1997 252,773 18,889 7.48
1998 228,601 17,725 7.75
1999 236,011 20,231 8.57
2000 242,085 23,040 9.52
2001 229,026 23,854 10.42
Needless to say, staff costs at DFS have risen over time. But with an average growth rate of 6% per year, it's hardly a case of the employees having DFS over a barrel. Meanwhile, sales per employee have bounced around the £225,000 mark. But there is a definite trend of rising staff costs as a proportion of sales at DFS.
Ideally, shareholders should see staff productivity outrunning growth in average salaries. Over time, such a performance should equate to staff costs declining as a proportion of sales. A very good example in this respect is Ulster Television (LSE: UTV):
Year to Sales per Average employee Employee costs/
December Employee cost Sales
(£) (£) (%)
1998 170,477 43,394 25.54
1999 195,612 35,250 18.02
2000 202,069 34,084 16.87
Comparisons
While staff ratio trends can highlight individual company (in)efficiencies, they can also be used to identify those businesses that are least reliant on its workforce.
For a long-term investment, sustainable competitive advantages are rarely based on highly-paid specialist employees who can leave at a moment's notice. In general, the best businesses to own for the long-term are those that generate plenty of revenues from a small number of low-skilled (i.e. low-paid) employees. As well as being simpler to run, such companies will obviously have some sort of other asset (e.g. economies of scale, a reputation, a patent, a brand, a government licence) that helps to fend off its rivals. Furthermore, those companies where total staff costs are low in proportion to revenues should be less susceptible to margin pressures from ongoing wage increases.
Here's how the Qualiport watch list companies compare on the three measures (the companies are listed in descending order of attractiveness, with the overall places based on each company's average ranked position for each ratio):
Sales per Average employee Employee costs/
employee cost Sales
(£) (£) (%)
DFS Furniture 229,026 23,854 10.42
Imperial Tobacco* 231,761 28,931 12.48
Allied Domecq 294,226 33,214 11.29
Carpetright 111,620 18,053 16.17
Latchways 218,628 33,581 15.36
London Stock Exch. 320,408 52,381 16.35
Ultraframe 114,302 22,885 20.02
SSL International 82,430 15,806 19.17
Ulster Television 202,069 34,084 16.87
PizzaExpress 29,321 9,336 31.84
Halma 87,716 24,465 27.89
Johnston Press 52,911 17,214 32.53
Games Workshop 41,973 15,207 36.23
Emap 179,642 36,467 20.30
Metal Bulletin 98,054 32,835 33.49
Renishaw 82,902 31,008 37.40
Lloyds TSB n/a 23,690 n/a
(*Figures exclude sales duty)
It's surprising to see retailers DFS and Carpetright (LSE: CPR) up there at the top. In a very competitive sector, it would be natural to assume such businesses would be heavily reliant on their sales forces. But DFS, for instance, has a lower proportion of its turnover spent on employees than Imperial Tobacco (LSE: IMT) or Allied Domecq (LSE: ALLD), two companies whose brands effectively sell themselves to consumers. There's obviously more to DFS and Carpetright than great sales floor techniques.
On the other hand, it's surprising to see Johnston Press (LSE: JPR) and Metal Bulletin (LSE: MTLB) languishing towards the bottom end of the table. Although both media firms are definite 'business franchises', both employ relatively large numbers of staff to generate their revenues.
Summary
On their own, staff ratios can't determine whether a company will be a great investment. Being able to judge a company's sustainable competitive advantage still underpins any prospective long-term stock pick. However, reviewing employee numbers and wage bills can help identify businesses where the competitive advantage could walk out and join a rival. Generally speaking, the best businesses to own are those that can generate the greatest revenues from the fewest employees while spending the least on salaries.
The author owns shares in Carpetright, Games Workshop, Johnston Press and Latchways