The Efogen Investment Club blog

It’s almost unbelievable that human capital is not recognised on the balance sheet. Today, when it universally recognised that people are the most important part of a company, we still don’t recognise human capital as an asset on the balance sheet due to accounting principles and regulations.

We still don’t capitalise staff salaries or any likewise expenditure when it is clearly obvious that expenditure on staff has an enduring benefit that extends way into the future. Training expenditure will give staff skills that will help them become more effective employees, and make them able to serve the company better. There is definitely a value to people.

Don’t get me wrong, I am not saying that accounting statements need to be overhauled to start capitilising staff salaries and the like. But what I am saying is that when analysing a company, and working out the net asset value, or return on assets ratio, one must take into account the value of one of the most valuable unrecognised assets – the value of its people.

To try and get a value for such an intangible asset is almost impossible to gauge. The value will change from company to company and from industry to industry. For technology companies it may not be as material, where the profit driver may be a website, or a system. But in most companies, such as a bank or a retail company, this value would be very large. Where service is the source of revenue, the company will rely on it people to bring in the bacon, while a company that sells a product will rely less on its people. However there is no such company that can run profitably without effective people. There can be a situation where a company has such poor service that you could say that their people are a liability to the company.

So again, when analysing a company, take into account the value of its management, its people, its expenditure on training, its recruitment process, etc etc. Recognise the value of a companies workforce.