Moscow State University of Economics, Statistics and Informatics (MESI)

Course work on: "Return on human capital investments"

Completed by:

Sarkisyan Olga

Khytornaya Ulia

Novikova Anya

2011

Introduction

Human capital is just one of an organisation's intangible assets. It is basically all of the competencies and commitment of the people within an organisation i.e. their skills, experience, potential and capacity. Other examples of intangible assets include: brand, software, design, working methods and customer relationships. The human capital asset captures all the people oriented capabilities we need for a business to be successful.

It's important to remember, however, that individuals are only an asset insofar as they choose to invest their human capital in an organisation.

Some people find the term Human Capital somewhat mechanistic, but human capital is not about describing people as economic units, rather it is a way of viewing people as critical contributors to an organisation's success. This then throws the spotlight on how businesses invest in their human capital asset, in order for it to add value. For any commercial organisation, this is an important component to understand. If a company understands how its human capital contributes to their business success, it can then be measured and managed more effectively.

Human capital management is a reciprocal relationship between supply and demand: employees, contractors and consultants invest their own human capital into business enterprises and the business enterprises need to manage the supplier. Any organisation interested in its performance will naturally ask how well they are managing this asset to ensure maximum return on their investment . In the same way, all employees, contractors, consultants and providers of human capital want to ensure they are getting the appropriate return for their own human capital investing through salary, bonuses, benefits, and so on.

Understanding how and why people add value or not to an organisation is an important, and difficult, management skill for the 21st century.

So, in the second part we paid attention to increasing of return on human capital investments. In the third how few business executives understand return on human capital.

1. Definition of 'Return on Invested Capital - roic'

A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. The return on invested capital measure gives a sense of how well a company is using its money to generate returns. Comparing a company's return on capital (ROIC) with its cost of capital (WACC) reveals whether invested capital was used effectively.

The general equation for ROIC is as follows:

Also known as "return on capital"

Total capital includes long-term debt, and common and preferred shares. Because some companies receive income from other sources or have other conflicting items in their net income, net operating profit after tax (NOPAT) may be used instead.

ROIC is always calculated as a percentage. Invested capital can be in buildings, projects, machinery, other companies etc. One downside of return on capital is that it tells nothing about where the return is being generated. For example, it does not specify whether it is from continuing operations or from a one-time event, such as a gain from foreign currency transactions.¹