Introduction
Capital is a corporation's lifeblood. It allows a corporation to keep its liquidity while expanding its activities. In most circumstances, capital refers to a company's tangible assets. It is also used to explain how a company obtains physical assets. Both physical and human capital is essential.
While human capital is difficult to quantify, the impact of human capital investments may be assessed and analyzed using the same ratios that are used to monitor and analyze the performance of physical asset investments. Both physical and human capital investments result in fundamental improvements to the company model and improved overall decision-making.
Human Capital vs Physical Capital
The main difference between human capital and physical capital is that human capital is a worker's knowledge, which gives talent, manner of education, capacities, preferences, and so on to an economy or a corporation. Physical capital, on the other hand, refers to man-made commodities that a firm brings or invests in making things.
Human capital refers to the collective intangible resources that humans possess. It encompasses abilities, skills, talents, knowledge, wisdom, etc, while Physical capital, tangible resources that contribute to the creation of products and services, is referred to as physical capital. In classical economics, physical capital is recognized as one of the essential capitals of the industrial process.
Difference Between Physical Capital and Human Capital in Tabular form
| Parameters of Comparison | Physical Capital | Human Capital |
| Definition | The term ‘physical capital’ refers to man-made commodities such as machinery, computers, tools, equipment, etc., which are maintained by the firm. | Human capital refers to the knowledge that an employee brings to the company in the form of education, talents, abilities, knowledge, preferences, etc. that they have gathered over time. As a result of that, employees are considered as assets to the company, whose value can be enhanced by spending on their coaching and improvement like any other asset of the firm. |
| The process of formation | Technical and economic | Conscious and social process |
| Is it tradable? | There is a possibility of trading physical capital in the market. | Only the services that are rendered by the human capital can be sold. |
| Is it separable? | Separable from the owner | Not separable |
| How does it depreciate? | Depreciation occurs due to continuous use. | Depreciation occurs due to ageing and can be minimized to a certain extent. |
What is Human Capital?
Intangible assets are non-physical forms of capital. Intangible assets are only recorded on a balance sheet if their values are known. Intangible assets, which cannot be touched, are typically represented by a legal document or paper.
Human capital is represented by more than just the company brand. The red logo of Harvard University does not differentiate it. The value of Harvard University is determined by its human capital. Human capital includes employees' knowledge bases and is typically measured by the quality of the product. It also refers to the network of the personnel base and the overall amount of influence in the sector.
Intangible assets include intellectual property such as brands, patents, customer lists, licensing agreements, and goodwill. Goodwill is produced when one company acquires or purchases another, and the purchase price exceeds the worth of the real assets purchased.
Gary Becker classified human capital into two types: general and specific human capital. Human capital, in general refers to the abilities and skills that help individuals in any organization. Specific human capital, on the other hand, refers to education and training that is only beneficial to the organization.
The difference is documented as goodwill, and one of the essential components of goodwill is human capital. Indeed, one of the few locations on the balance sheet where an analyst can find value for human capital is in goodwill.
Types of Human Capital
You can separate human capital into three types: knowledge capital, social capital, and emotional capital. Let's look at some examples of each:
Knowledge Capital
- Trade school education
- College degree
- Hard skills
- Work experience
- Situational knowledge
- Intelligence
Social Capital
- Relationships
- Fame
- Social status
- Professional network
- Health
Emotional Capital
- Emotional intelligence
- Creativity
- Problem-solving
- Personal resilience
- Critical thinking
- Loyalty
- Leadership behavior
- Other soft skills
Human capital examples
People are a company's greatest asset. The following examples of human capital show how fostering it can benefit both individuals and an organization as a whole.
Johnson & Johnson (J&J) recognizes the importance of health as a component of human capital. As a result, they are an industry leader in employee health and well-being. Among other health advantages, J&J offers a free course called Energy for Performance to employees. Throughout this session, employees will learn about foods and activities that have been proven to enhance energy levels. It also supports employees in determining what is most essential in their lives. The course increased employee productivity and decreased attrition rates.
"Having your people at their best and entirely engaged is a business issue - it's not just wonderful to have," says Susan Podlogar, Vice President of Total Rewards.
BM invests in human capital via reskilling its employees. In 2019, IBM announced its SkillBuild platform. SkillBuild employs artificial intelligence (AI) technology to equip students and job seekers with the skills needed to qualify for growing positions in technology. This free program helps people from all walks of life build their human capital. This group includes refugees, veterans, and low-wage employees. With this initiative, IBM ensures that everyone has an equal opportunity to obtain the skills and knowledge required for a position in the IT industry.
What is Physical Capital?
Physical capital is made up of manufactured goods that aid in the production process. Cash, real estate, equipment, and inventory are examples of physical capital. Physical capital values are listed on the balance sheet in order of solvency.
The balance sheet summarises the value of all physical assets as well as some non-physical assets. It also summarises the capital raised to pay for the assets, which includes both physical and human capital.
On the balance sheet, physical capital is recorded as an asset at historical cost rather than market value. As a result, asset book value is frequently greater than market value. Physical capital is referred to as a tangible asset by accountants. Many types of physical capital are long-term assets with long economic lives. Physical capital is neither destroyed nor consumed during the manufacturing process, although it may decline over time.
Because physical capital is illiquid, adding value to it is difficult. The manufacturing method and goal may necessitate the customization of equipment and machinery. As a result, the organization is having difficulty determining the value of its equipment and apparatus. A beverage manufacturing firm with a specific bottle design, for example, may suffer from the resale of a bottle-making machine because the unit can only create a single type of bottle. In this case, evaluating the machine will be difficult.
Types of Physical Capital
Physical capital is often broken down into two different types including:
Working Capital
It is a company's liquid assets, such as cash and merchandise on hand, or anything that can be quickly converted into currency.
Fixed Capital
It can be regarded as tangible investments in the production of a good that can be employed several times or at least over multiple accounting periods. It cannot be easily changed to cash because it is fixed and reusable (e.g., buildings and machinery). Although it is not consumed during the manufacturing process, its long-term worth can fluctuate and, in most circumstances, decrease over time.
Example of Physical Capital
According to analysts, physical capital is an important aspect of evaluating a company's valuation. Surprisingly, it might be one of the most difficult things to value. To begin, economists frequently disagree on the specific characteristics of the three production components.
Consider the Coca-Cola Company's corporate headquarters in Atlanta. Some may regard office buildings to be physical capital because they are man-made structures. Others may regard the corporate plaza to fall within the category of land/real estate.
Second, because physical capital is typically intended to serve a specific function, it is frequently somewhat illiquid. The machine that caps the iconic Coca-Cola soda pop bottles is unlikely to be useful to anyone other than another beverage company—and even then, considering that the equipment is likely designed to fit the unique Coke glasses.
Most physical capital objects are also fixed capital, which means they are reusable and are not consumed or destroyed during the creation of a thing or service. As a result, a fixed capital item has long-term value. However, that value may fluctuate over time. It generally falls.
Main Difference Between Human Capital and Physical Capital in Points
- Human capital includes inanimate man-made assets such as machines, buildings, automobiles, and equipment. Physical capital, on the other hand, is made up of the skills, experience, talent, education, abilities, and so on that humans have individually or collectively.
- Human capital is intangible, whereas physical capital is tangible.
- Only the service offered by the owner of the human capital can be sold on the market, not the human capital itself. Physical capital, like any other commodity, can be traded on the market.
- Human capital is difficult to transmit internationally due to migration and cultural obstacles. Physical capital, on the other hand, can be easily carried globally.
- Human capital grows over time as a result of further solid training and education, as well as good health. Physical capital, on the other hand, depreciates over time due to ongoing use.
Conclusion
Human capital's value is commonly assumed, as opposed to physical capital, which is easily discovered on the balance sheet (and in the notes to the balance sheet). Analysts can assess the impact of human capital on operations by employing efficiency ratios like return on assets (ROA) and return on equity (ROE), in addition to goodwill (ROE).
The primary distinction between human capital and physical capital is that human capital refers to human qualities possessed both individually and collectively that cannot be separated from the owner, whereas physical capital refers to man-made resources such as machinery, equipment, buildings, and vehicles that organizations acquire to support the manufacturing process and can be easily separated from its owner.
Investors can also determine the value of human capital by examining the markup on things sold or the industry compensation premium. A company is willing to pay a higher salary for an experienced programmer who can develop a higher-margin product. The value of a programmer's experience is determined by how much the company is willing to pay above and above the market price.