Mercedes 1999 Annual Report Download - page 70

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ANALYSIS OF THE FINANCIAL SITUATION
64
Net assets are determined on the basis of book values, as
shown in the following table.
capital, is defined as the minimum rate of return which in-
vestors expect for invested equity and borrowings. These
capital costs are mainly determined by long-term bond rates
combined with a risk premium for investments in stocks.
For the Group we currently calculate a weighted average
cost of capital of 9.2% after taxes.
For the industrial business units we use operating profit as
an earnings measure, a commonly accepted performance
measure before interest and taxes, as this more accurately
reflects the areas of responsibility under the control of busi-
ness unit management. The industrial business units also
use net assets which is defined as assets minus non-inter-
est-bearing liabilities as a capital basis. The minimum re-
quired rate of return on net assets is 15.5%. For our finan-
cial services activities we apply, as is usual in this sector,
return on equity as a performance measure. The target rate
of return on equity is 20% (before taxes).
Furthermore, value added, defined as the absolute perform-
ance measure after deducting the average cost of capital,
serves as an additional important performance measure for
controlling profitable growth. Particularly in those areas in
which the rates of return achieved are significantly higher
than the cost of capital, continued growth in value can pri-
marily be achieved by selectively utilizing growth opportu-
nities while maintaining profitability.
Within the framework of our strategic value management
we also define value added goals for the individual business
units of the Group. For this purpose we carry out bench-
mark analyses of the returns and growth rates of the com-
petitors within each sector.
In 1999 net operating income, which is derived from net in-
come, rose by 10.6% to €7.0 billion. An increase in annual
average net assets from €50.1 billion to €53.2 billion – a
lower growth rate than that of revenues –led to an improve-
ment in return on net assets for the DaimlerChrysler Group
from 12.7% to 13.2%. This meant that our return on capital
again clearly exceeded the weighted average cost of capital
of 9.2%. A particularly positive point was the fact that all of
the automotive divisions again improved their return on net
assets compared with the previous year and exceeded the
minimum required rate of return of 15.5% by a large mar-
gin. The return on net assets for Rail Systems was again
negative, as the business situation was still unsatisfactory
and because of the restructuring measures that were initi-
ated. In the financial services business return on equity
was 18.4%, somewhat lower than in the preceding year and
below the ambitious minimum required rate of return we
had set for the business.
The value added of the DaimlerChrysler Group increased
during 1999 by €387 million to €2.1 billion. The main
contributions came from the divisions Mercedes-Benz
Passenger Cars & smart and Chrysler Group.
99 98
%(annual average, in billions of €)
Net Assets
99
Net Assets and
Return on Net Assets
DaimlerChrysler Group
(after taxes)
Industrial businesses
(before interest and taxes)
Mercedes-Benz Passenger
Cars & smart
Chrysler Group
(Chrysler, Jeep®, Dodge, Plymouth)
Commercial Vehicles
(Mercedes-Benz, Freightliner,
Sterling, Setra, Thomas Built Buses)
Services1)
Aerospace2)
Rail Systems,
Automotive Electronics,
MTU/Diesel Engines
Financial Services
53.2 50.1 13.2 12.7
39.0 35.1 24.0 21.9
9.6 8.0 28.2 25.1
19.5 17.6 25.9 24.2
6.0 5.5 17.8 17.1
0.8 0.5 15.0 16.0
2.2 1.4 33.8 43.0
1.0 1.2 (29.1) (18.4)
%
Return on Net Assets
98
Stockholders’ Equity Return on Equity3)
1) Excluding Financial Services
2) The organization of business procedures in the aerospace industry, under
which a part of the capital employed is generally financed by advance
payments, results in a relatively low capital base and a correspondingly
higher RONA value and is therefore not directly comparable with RONA
values from other industrial sectors.
3) Before taxes
1) Represents the value at year-end; the average for the year was
€53.2 billion (1998: €50.1 billion)
991) 981)
€€
Net Assets
of the DaimlerChrysler Group
in millions
Stockholders’ equity
Minority interests
Financial liabilities of the
industrial segment
Pension provisions of the
industrial segment
Net Assets
36,060 30,367
650 691
4,400 3,631
14,014 16,535
55,124 51,224
5.1 4.3 18.4 20.7