Unlocking the Correlation Between HR Metrics and Financial Ratios: A Comprehensive Guide for HR Professionals

This article explores the correlation between HR metrics and major financial ratios in organizations.

It highlights key HR metrics that can be monitored to improve financial performance, such as employee productivity, turnover rate, compensation costs, training and development costs, engagement, absenteeism rate, retention rate, satisfaction, diversity, and health and safety.

By capturing these metrics using HRIS, companies can gain valuable insights into their workforce and make data-driven decisions to improve employee engagement, productivity, and retention, ultimately leading to higher financial ratios.

1. Gross Profit Margin:

This ratio measures the percentage of revenue that remains after deducting the cost of goods sold. It indicates how efficiently a company is using its resources to produce and sell its products or services.

HR Metric you can look at and monitor.

Employee productivity is a key HR metric that is correlated to gross profit margin. This metric measures the amount of revenue generated per employee. Higher employee productivity can lead to higher gross profit margins.

Employee Productivity: This metric measures the amount of output produced by each employee. It can be captured by HRIS by tracking the number of units produced, the number of sales made, or the number of billable hours worked. The formula for measuring employee productivity is:

Employee Productivity = Output / Input

Example: A manufacturing company that invests in employee training and development programs can improve employee productivity. This can lead to higher production levels and ultimately, higher gross profit margins.

2. Operating Profit Margin:

This ratio measures the percentage of revenue that remains after deducting all operating expenses. It indicates how efficiently a company is managing its day-to-day operations.

HR Metric you can look at and monitor.

Employee turnover rate is a key HR metric that is correlated to operating profit margin. High employee turnover can lead to increased recruitment and training costs, which can negatively impact operating profit margins.

Employee Turnover Rate:

This metric measures the percentage of employees who leave a company over a certain period of time. It can be captured by HRIS by tracking the number of employees who leave and the total number of employees. The formula for measuring employee turnover rate is:

Employee Turnover Rate = (Number of Employees Who Left / Total Number of Employees) x 100

Example: A retail company that experiences high employee turnover may struggle to maintain consistent customer service levels. This can lead to decreased sales and ultimately, lower operating profit margins.

3. Net Profit Margin:

This ratio measures the percentage of revenue that remains after deducting all expenses, including taxes and interest. It indicates how much profit a company is generating from its operations.

HR Metric you can look at and monitor.

Employee compensation costs are a key HR metric that is correlated to net profit margin. Higher compensation costs can lead to lower net profit margins.

Employee Compensation Costs:

This metric measures the total cost of employee salaries, benefits, and other compensation. It can be captured by HRIS by tracking payroll data and benefits information. The formula for measuring employee compensation costs is:

Employee Compensation Costs = Total Cost of Salaries + Total Cost of Benefits

Example: A technology company that offers generous employee benefits and salaries may experience higher compensation costs. This can lead to lower net profit margins, especially if the company is not generating enough revenue to offset these costs.

4. Return on Assets (ROA):

This ratio measures how efficiently a company is using its assets to generate profit. It indicates the amount of profit a company is generating for each dollar of assets it owns.

HR Metric you can look at and monitor.

Employee training and development costs are a key HR metric that is correlated to ROA. Higher training and development costs can lead to higher employee productivity, which can ultimately lead to higher ROA.

Employee Training and Development Costs:

This metric measures the total cost of employee training and development programs. It can be captured by HRIS by tracking training expenses and employee participation rates. The formula for measuring employee training and development costs is:

Employee Training and Development Costs = Total Cost of Training Programs / Total Number of Employees

Example: A consulting company that invests in employee training and development programs can improve employee skills and knowledge. This can lead to higher billable hours and ultimately, higher ROA.

5. Return on Equity (ROE):

This ratio measures how efficiently a company is using its equity to generate profit. It indicates the amount of profit a company is generating for each dollar of equity it has.

HR Metric you can look at and monitor.

Employee engagement is a key HR metric that is correlated to ROE. Higher employee engagement can lead to higher productivity and ultimately, higher ROE.

Employee Engagement: This metric measures the level of commitment and motivation employees have towards their work. It can be captured by HRIS by conducting employee surveys or focus groups. The formula for measuring employee engagement is:

Employee Engagement = (Number of Engaged Employees / Total Number of Employees) x 100

Example: A financial services company that invests in employee engagement programs can improve employee morale and motivation. This can lead to higher productivity levels and ultimately, higher ROE.

6. Current Ratio:

This ratio measures a company's ability to pay its short-term debts using its current assets. It indicates whether a company has enough liquid assets to cover its short-term obligations.

HR Metric you can look at and monitor.

Employee turnover rate is a key HR metric that is correlated to current ratio. High employee turnover can lead to increased recruitment and training costs, which can negatively impact current ratio.

Employee Turnover Rate:

Employee Turnover Rate = (Number of Employees Who Left / Total Number of Employees) x 100

Example: A manufacturing company that experiences high employee turnover may struggle to maintain consistent production levels. This can lead to decreased inventory levels and ultimately, lower current ratios.

7. Quick Ratio:

This ratio measures a company's ability to pay its short-term debts using its most liquid assets, such as cash and accounts receivable. It indicates whether a company has enough liquid assets to cover its short-term obligations in case of an emergency.

HR Metric you can look at and monitor.

Employee productivity is a key HR metric that is correlated to quick ratio. Higher employee productivity can lead to higher production levels, which can ultimately lead to higher quick ratios.

Example: A food processing company that invests in employee training and development programs can improve employee productivity. This can lead to higher production levels and ultimately, higher quick ratios.

8. Inventory Turnover Ratio:

This ratio measures how quickly a company is selling its inventory. It indicates how efficiently a company is managing its inventory levels and whether it is able to sell its products in a timely manner.

HR Metric you can look at and monitor.

Employee productivity is a key HR metric that is correlated to inventory turnover ratio. Higher employee productivity can lead to higher production levels, which can ultimately lead to higher inventory turnover ratios.

Example: A retail company that invests in employee training and development programs can improve employee productivity. This can lead to higher sales and ultimately, higher inventory turnover ratios.

9. Accounts Receivable Turnover Ratio:

This ratio measures how quickly a company is collecting payments from its customers. It indicates how efficiently a company is managing its accounts receivable and whether it is able to collect payments in a timely manner.

HR Metric you can look at and monitor.

Employee productivity is a key HR metric that is correlated to accounts receivable turnover ratio. Higher employee productivity can lead to higher billable hours, which can ultimately lead to higher accounts receivable turnover ratios.

Example: A law firm that invests in employee training and development programs can improve employee skills and knowledge. This can lead to higher billable hours and ultimately, higher accounts receivable turnover ratios.

10. Accounts Payable Turnover Ratio:

This ratio measures how quickly a company is paying its suppliers. It indicates how efficiently a company is managing its accounts payable and whether it is able to pay its suppliers in a timely manner.

HR Metric you can look at and monitor.

Employee productivity is a key HR metric that is correlated to accounts payable turnover ratio. Higher employee productivity can lead to higher production levels, which can ultimately lead to higher accounts payable turnover ratios.

11. Debt-to-Equity Ratio:

This ratio measures the amount of debt a company has relative to its equity. It indicates how much of a company's assets are financed by debt and how much are financed by equity.

HR Metric you can look at and monitor.

Employee compensation costs are a key HR metric that is correlated to debt-to-equity ratio. Higher compensation costs can lead to higher debt levels, which can ultimately lead to higher debt-to-equity ratios.

Example: A healthcare company that offers generous employee benefits and salaries may experience higher compensation costs. This can lead to higher debt levels and ultimately, higher debt-to-equity ratios.

12. Debt-to-Asset Ratio:

This ratio measures the amount of debt a company has relative to its total assets. It indicates how much of a company's assets are financed by debt.

HR Metric you can look at and monitor.

Employee compensation costs are a key HR metric that is correlated to debt-to-asset ratio. Higher compensation costs can lead to higher debt levels, which can ultimately lead to higher debt-to-asset ratios.

Example: A technology company that offers generous employee benefits and salaries may experience higher compensation costs. This can lead to higher debt levels and ultimately, higher debt-to-asset ratios.

13. Interest Coverage Ratio:

This ratio measures a company's ability to pay its interest expenses using its earnings before interest and taxes (EBIT). It indicates whether a company has enough earnings to cover its interest expenses.

HR Metric you can look at and monitor.

Employee productivity is a key HR metric that is correlated to interest coverage ratio. Higher employee productivity can lead to higher revenue levels, which can ultimately lead to higher interest coverage ratios.

Example: A marketing company that invests in employee training and development programs can improve employee skills and knowledge. This can lead to higher revenue levels and ultimately, higher interest coverage ratios. This can help the company to better manage its debt and interest payments.

14. Earnings per Share (EPS):

This ratio measures the amount of profit a company generates per share of its common stock. It indicates how much profit a company is generating for each share of its stock.

HR Metric you can look at and monitor.

Employee productivity is a key HR metric that is correlated to EPS. Higher employee productivity can lead to higher revenue levels, which can ultimately lead to higher EPS.

Example: A software company that invests in employee training and development programs can improve employee skills and knowledge. This can lead to higher revenue levels and ultimately, higher EPS.

15. Price-to-Earnings Ratio (P/E Ratio):

This ratio measures the price of a company's stock relative to its earnings per share. It indicates how much investors are willing to pay for each dollar of a company's earnings.

HR Metric you can look at and monitor.

Employee turnover rate is a key HR metric that is correlated to P/E ratio. High employee turnover can lead to increased recruitment and training costs, which can negatively impact P/E ratio.

Example: A retail company that experiences high employee turnover may struggle to maintain consistent customer service levels. This can lead to decreased sales and ultimately, lower P/E ratios.

Other HR Metrics to keep track of and monitor in line with the above. Mind you this is NOT an exhaustive list but a guideline to assist any HR professional in getting their HR analytics on point and in the right direction.

These HR metrics can be used to evaluate the effectiveness of HR programs and initiatives, and to identify areas for improvement. By capturing these metrics using HRIS, companies can gain valuable insights into their workforce and make data-driven decisions to improve employee engagement, productivity, and retention.

Employee Absenteeism Rate:

This metric measures the percentage of employees who are absent from work over a certain period of time. It can be captured by HRIS by tracking employee attendance records. The formula for measuring employee absenteeism rate is:

Employee Absenteeism Rate = (Number of Absent Employees / Total Number of Employees) x 100

Employee Retention Rate:

This metric measures the percentage of employees who stay with a company over a certain period of time. It can be captured by HRIS by tracking the number of employees who stay and the total number of employees. The formula for measuring employee retention rate is:

Employee Retention Rate = (Number of Employees Who Stayed / Total Number of Employees) x 100

Employee Satisfaction:

This metric measures the level of satisfaction employees have with their work and their work environment. It can be captured by HRIS by conducting employee surveys or focus groups. The formula for measuring employee satisfaction is:

Employee Satisfaction = (Number of Satisfied Employees / Total Number of Employees) x 100

Employee Diversity:

This metric measures the level of diversity within a company's workforce. It can be captured by HRIS by tracking employee demographics. The formula for measuring employee diversity is:

Employee Diversity = (Number of Diverse Employees / Total Number of Employees) x 100

Employee Health and Safety:

This metric measures the level of employee health and safety within a company. It can be captured by HRIS by tracking workplace injuries and illnesses. The formula for measuring employee health and safety is:

Employee Health and Safety = (Number of Safe Employees / Total Number of Employees) x 100

In conclusion, this article highlights the correlation between HR metrics and major financial ratios in organizations. It provides key HR metrics that can be monitored to improve financial performance, such as employee productivity, turnover rate, compensation costs, training and development costs, engagement, absenteeism rate, retention rate, satisfaction, diversity, and health and safety. By capturing these metrics using HRIS, companies can gain valuable insights into their workforce and make data-driven decisions to improve employee engagement, productivity, and retention, ultimately leading to higher financial ratios. It is important for HR professionals to keep track of these metrics to evaluate the effectiveness of HR programs and initiatives and identify areas for improvement. By doing so, HR professionals can play a strategic partnership role in improving financial performance in their organizations.