Even after decades of study by the sharpest minds in finance, there is no clear agreement on the factors that help predict stock prices, just the best Metric Accountants can manage and predict finances perfectly. A company’s net income and revenue are considered the gold standards for shaping expectations of stock performance. But some value-oriented investors watch the price-to-book ratio, and others look at price-earnings ratio. Researchers have also found correlations with general market momentum and something called “mean reversion.”
But a new study reported in CFO Magazine provides strong evidence that certain workforce metrics can help predict a company’s performance in the stock markets.
The research tested the relationships between a set of human capital metrics and stock-price movements at 22,100 companies from 1996 through 2011. A key finding of the study, performed by Jeff Higgins, CEO of the Human Capital Management Institute, and Donald Atwater, Professor at Pepperdine University, could surprise investors, stock analysts and finance executives. If you are interested in getting into trading stocks check out this great website at CM Trading.
The research found net income per full-time-equivalent employee (FTE) and net revenue per FTE (both commonly used financial metrics) to be the poorest predictors among the studied human capital metrics. Instead, two metrics used by some human capital analysts are stronger predictors of stock price:
- Return on Human Capital Investment (Return on HCI), compares “Total Cost of Workforce” (TCOW) to net operating profit. (TCOW includes all direct and indirect cash or equity compensation for employees and contingent workers; paid employee benefits, perks and rewards; retirement costs for both current and former employees; and costs for training, recruiting, employee relations, and severance and legal settlements.)
- Human Capital ROI Ratio measures the ratio of return on revenue (net of non-workforce expenses) to TCOW. CFO gives this example: a company has $1 billion in revenue and $800 million in total expenses, $500 million of which are labor costs. To arrive at HC ROI ratio, subtract the $300 million non-labor costs from revenue, leaving $700 million, and divide that by the $500 million in people costs.
These two metrics are different ways of measuring the percentage return on $1 invested in the work force, assuming all other factors remain constant. “Everyone thinks net profit drives stock price,” Higgins told CFO Magazine, “ but what really drives stock price is productivity.” He added, ” When those numbers improve, your stock price jumps.”
On a industry basis, the study shows that the wholesale-trade sector led the way with a 9.6% rise in share price when the human capital metrics rise 10 percent and manufacturing followed close behind with a 7.5% rise.
Whether you’re on the financial or operational side of the business, this study should help you see labor management in a new light–both as a method to improve workforce performance and reduce labor costs, and as a key driver of your company’s stock price.