Valuation in Context

Human Capital

1

Human capital refers to the ability of a firm to effectively hire and retain individuals or collective employees, that add significant value to the firm. The most profitable companies are the best at this process.

2

More specifically, human capital includes the educational background, intelligence, skills, and health of the employee, as well as their training, loyalty, and punctuality. All of which increase productivity.

3

With increased productivity, a company can expect to make higher profits. Therefore, companies that invest a lot into human capital, tend to be more successful and more profitable.

4

A key way to measure how well a company deals with human capital is staff turnover. If staff turnover is high, it suggests that staff are not satisfied, leading to higher costs for a business and lower productivity.

Test your knowledge...

1. How much can you expect to earn from a cash investment?

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