The financial performance measures used at Daimler are oriented towards our investors’ interests and expectations and provide the foundation for our value-based management.
Value added is a key element of our performance measurement system, which is applied at both the Group and the divisional level. It is calculated as the difference between the operating result and the cost of capital of the average net assets. Alternatively, the value added of the industrial divisions can be determined by using the main value drivers: return on sales (quotient of EBIT and revenue) and net assets’ productivity (quotient of revenue and net assets).
During the year 2013, value added increased to €5.9 billion (2012: €4.3 billion). The quantitative development of value added and the other financial performance measures is explained in the next page „The figures in 2013”.
Using the combination of return on sales and net assets’ productivity within the context of a strategy of profitable revenue growth provides the basis for a positive development of value added. Value added shows to which extent the Group and its divisions achieve or exceed the minimum return requirements of the shareholders and creditors, thus creating additional value.
The measure of operating profit at divisional level is EBIT, which is calculated before interest and income taxes. EBIT hence reflects the divisions’ profit and loss responsibility. The operating profit measure used at Group level is net operating profit. It comprises the EBIT of the divisions as well as profit and loss effects for which the divisions are not held responsible, including income taxes and other reconciliation items.
Net assets represent the basis for the investors’ required return. The industrial divisions are accountable for the net operating assets; all assets, liabilities and provisions which they are responsible for in day-to-day operations are therefore allocated to them. Performance measurement at Daimler Financial Services is on an equity basis, in line with the usual practice in the banking business. Net assets at Group level include the net assets of the industrial divisions and the equity of Daimler Financial Services, as well as assets and liabilities from income taxes and other reconciliation items which cannot be allocated to the divisions. Average annual net assets are calculated from average quarterly net assets.
Cost of capital.
The required rate of return on net assets and hence the cost of capital is derived from the minimum rates of return that investors expect on their invested capital. The cost of capital of the Group and the industrial divisions comprises the cost of equity as well as the costs of debt and pension obligations of the industrial business; the expected returns on liquidity and plan assets of the pension funds of the industrial business are considered with the opposite sign. The cost of equity is calculated according to the capital asset pricing model (CAPM), using the interest rate for long-term risk-free securities (such as German government bonds) plus a risk premium reflecting the specific risks of an investment in Daimler shares. While the cost of debt is derived from the required rate of return for obligations entered into by the Group with external lenders, the cost of capital for pension obligations is calculated on the basis of discount rates used in accordance with IFRS. The expected return on liquidity is based on money market interest rates. The Group’s cost of capital is the weighted average of the individually required or expected rates of return; in the reporting period, the cost of capital amounted to 8% after taxes. For the industrial divisions, the cost of capital amounted to 12% before taxes; for Daimler Financial Services, a cost of equity of 13% before taxes was applied.
| Cost of capital |
| || 2013 || 2012 |
| In percent || || |
| || || |
| Group, after taxes || 8 || 8 |
| Industrial dvisions, before taxes || 12 || 12 |
| Daimler Financial Services, before taxes || 13 || 13 |Return on sales.
As one of the main factors influencing value added, return on sales is of particular importance for assessing the industrial divisions’ profitability. The combination of return on sales and net assets’ productivity results in return on net assets (RONA). If RONA exceeds the cost of capital, value is created for our shareholders. The profitability measure for Daimler Financial Services is not return on sales, but return on equity, in line with the usual practice in the banking business.
Key performance indicators.
Key financial indicators for measuring our operating financial performance, in addition to EBIT and revenue, are the free cash flow of the industrial business, investment, and research and development expenditure. As well as the indicators of financial performance, we also use various non-financial indicators for the Group’s management. Of particular importance in this respect are the unit sales of our automotive divisions, which we use as the basis for our capacity and human resources planning, and employee numbers.
Furthermore, within the context of our sustainability management, we use other non-financial indicators such as the CO2 emissions of our vehicle fleet or the energy and water consumption of our production sites.