Have you ever wondered if executives or investors really understand the value of the people in the company? Do you ever wonder if the “powers that be” truly understand that if you invest in employees, the company will actually do better? The quick answer is that the CFO and Wall Street sometimes get it, but for those employers that don’t quite yet get it, read on to learn how investing in your employees can help drive up your company stock price.
The major movers and shakers in the global economies – like hedge funds, pension funds, and major banks like JPMorgan Chase and Credit Suisse –understand that the global and U.S. economy has switched from a goods-based economy to a services-based economy. In fact, about 70% of the U.S. economy is based on services. As a result, the material portion of most companies, and as a result the U.S. economy, is based on selling services. This includes everything from cooking, cleaning, designing, writing, business consulting, etc..! But the common factor is that it requires someone dream up the great service idea, someone to implement it, someone to work with customers and someone to maintain those services. It is all of those “someones” that can make or break a service. More simply put and regardless of the service: If a company doesn’t have good talent, it will fail. And, investors know this!
Book Value & the Impact of People:
While the stock market and individual stocks are impacted a lot by psychology, there is a basic “floor” on stock prices based on the value of the assets in the company. If a company has lots of assets like real estate, machinery, or CASH, then there is a true value to the company. The value of the assets (less the liabilities) is called the book value. Stocks typically trade above the book value because if they go below book value someone could buy the stock up, liquidate the company and make a positive return.
This is where people play a tremendous part in the stock value! Investors understand that the people in the company are what make the true value. The ideas generated, execution of ideas, and awesome customer service make a company a good investment. As a result, there is a stock ratio called price to book ratio, which divides the price of the stock by the book value. So, any value above one shows that the investors think there is more potential.
Facebook as an Example:
If you look at the assets of Facebook, you realize there are not a lot. Some building, some servers, but not a lot you could sell if you are liquidating the business. So what are investors investing in? They are investing in Facebook’s ability to continue to innovate and maintain the internet presence that they are, which simply means the people, and which explains why Facebook has a price to book ratio of 5.23 right now. To give some contrast: GE, which has a lot of assets (jet engines, machinery, etc.), has a price to book ratio less than 2.
An Investing Guessing Game:
What is humorous about this is that companies under SEC guidelines report a bare minimum about their people. Investors have to guess a whole lot about the quality of the teams, the level of human capital investment, etc. But next time, if you ever wonder if the people in your company affect the stock price, you’ll know the answer is definitely! Just check the price to book ratio.