A:

Human capital is the knowledge, skill sets and intangible assets that add economic value to an individual. Human capital is not a static measure and can be improved. It is an intangible asset and is just as valuable as a tangible asset. A manager can use various measures to evaluate the economic value added by his staff. One approach a manager can use is measuring human capital as a return on investment (ROI).

Since human capital can be built upon through investing in employees' skill sets and knowledge through higher education and workshops, a manager can calculate the investments made on human capital. Managers can calculate the total profits a company generates before and after investing on its employees' capital. The ROI of human capital is calculated by dividing the company's total profits by its total investment on human capital.

For example, suppose company TECH, a technology company, launches a new program to invest in its employees' knowledge and skill sets in order to increase productivity and creativity. Assume the company invests $1 million into human capital and has total profits of $20 million. The managers of TECH can compare its human capital's ROI year over year so they can track improvements of profitability and whether it is linked to the current program.

Managers can also compare the ROI of human capital to other companies to gauge how well the company's investments in human capital are, relative to the industry. In the example above, TECH has a ROI of human capital of 20; managers can compare this to other companies of the technology industry. Suppose the industry average of human capital's ROI is 8; this signals to managers that the company's program is sufficient and outperforms other companies.

RELATED FAQS
  1. How do firms improve their employees' human capital?

    Learn what human capital is, how a firm can benefit from improving human capital and some ways a firm can improve its employees' ... Read Answer >>
  2. How can return on investment (ROI) calculations be manipulated?

    Check out an example of how the return on investment (ROI) for similar investments can vary greatly, depending on how the ... Read Answer >>
  3. At what stage of business should human resources planning occur?

    See why strategic human resources planning is an ongoing process, and learn how an HR department plays a crucial role in ... Read Answer >>
  4. How does total capital investment influence economic growth?

    Discover the basic relationship between capital investment and economic growth, and why improving the capital structure increases ... Read Answer >>
  5. What is the formula for calculating return on investment (ROI) in Excel?

    Find out more about return on investment (ROI) and the formula used for calculating return on investment for a company in ... Read Answer >>
  6. How are labor demand forecasts made in human resources planning?

    Discover how human resource planning might be used to estimate the correct demand for labor in a given market, both qualitatively ... Read Answer >>
Related Articles
  1. Financial Advisor

    Don't Ignore the Importance of Human Capital

    Are you ignoring the value of human capital in your financial planning? This oft-overlooked asset should be an important component of your financial plan.
  2. Investing

    Your Human Capital Might Be Your Greatest Asset

    When allocating your assets, don't forget one of your most valuable assets - human capital.
  3. Financial Advisor

    How To Calculate Return On Investment (ROI)

    Return on investment allows an investor to evaluate the performance of an investment and compare it to others in his or her portfolio. Find out how to calculate ROI and how to use to your advantage. ...
  4. Small Business

    How To Calculate ROI Of A Marketing Campaign

    Learn to make the most of your marketing spend. Know how to measure its results by calculating the return on investment (ROI) of a campaign.
  5. Personal Finance

    College Tuition vs. Investing: Is It Worth It?

    With the rising cost of college and questionable career prospects awaiting college graduates, some are wondering if a college education is still worth it.
  6. Investing

    Return on Investment (ROI) Vs. Internal Rate of Return (IRR)

    Read about the similarities and differences between an investment's internal rate of return (IRR) and its return on investment (ROI).
  7. Insights

    Movie Genres That Make The Most Money

    Success in Hollywood isn't just measured by ticket sales - development costs play a large part, too.
  8. Tech

    How to Calculate ROI in Excel

    Daniel Jassy, CFA, shows how to calculate ROI in Excel.
RELATED TERMS
  1. Manual Trading

    A trading system that involves human decision-making for entering ...
  2. Homo Economicus

    A term that describes the rational human being assumed by some ...
  3. Knowledge Engineering

    Knowledge engineering is a field of artificial intelligence (AI) ...
  4. Capitalization Of Earnings

    A method of determining the value of an organization by calculating ...
  5. Financial Singularity

    A financial singularity is the point at which investment decisions ...
  6. Capital Funding

    Capital funding is the money that lenders and equity holders ...
Hot Definitions
  1. Donchian Channels

    A moving average indicator developed by Richard Donchian. It plots the highest high and lowest low over the last period time ...
  2. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, ...
  3. Moving Average - MA

    A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out ...
  4. Stop Order

    A stop order is an order to buy or sell a security when its price increases past a particular point in order to limit losses ...
  5. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
  6. Candlestick

    A chart that displays the high, low, opening and closing prices for a security for a single day. The wide part of the candlestick ...
Trading Center