Mercedes 2004 Annual Report Download - page 34

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The profitability ratio, return on net assets (RONA) has a special
significance as a fundamental component of value added. By
examining the ratio of net operating income to average capital
employed, a statement can be made about the profitability of
the Group or the divisions/business units using standard units of
measure. To assess the profitability of the financial services
business, return on equity (ROE) is used.
The required rate of return on capital employed and thus the cost
of capital are derived from the minimum returns that investors
expect on their invested capital. Due to the long-term financing
character, non-funded pension obligations are included in addi-
tion to equity and borrowings in the determination of the Group’s
cost of capital. The cost of equity is determined according to the
capital-asset pricing model, using the interest rate for long-term,
risk-free securities (i.e. government bonds, fixed-interest bonds)
plus a risk premium for an investment in shares reflecting the
specific risks of the DaimlerChrysler Group. The cost of borrowed
capital is derived from the required rate of return for obligations
entered into by the Group with outside sources supplying the
capital. The capital costs for the non-funded pension obligations
are calculated on the basis of the discount rates used pursuant
to US GAAP. The Group’s cost of capital is then a result of the
weighted average of the individual required rates of return, and
amounted to 8% after taxes in 2004. At the level of the industrial
divisions/business units, the cost of capital amounted to 13%
before taxes; for the financial services business a return on equi-
ty of 14% before taxes was used. Primarily due to the sustained
fall in interest rates, the Group’s cost of capital has been reduced
to 7% after taxes at the beginning of 2005. For the industrial
divisions/business units, this will result in a cost of capital before
taxes of 11%. The return on equity before taxes required for the
financial services business remains unchanged at 14%.
Development of return on net assets
Net operating income amounted to €3.2 billion in 2004, com-
pared with €1.5 billion in the prior year. In combination with a
decrease in average net assets of €3.7 billion to €56.3 billion,
this resulted in a return on net assets (RONA) for the Group of
5.6% after taxes (2003: 2.4%). Value added thus improved by €2.0
billion to minus €1.3 billion. Calculated with cost of capital of 7%
value added would have been minus €0.8 billion.
With a RONA of 12.3% in 2004, the Mercedes Car Group did not
achieve the minimum required rate of return. The considerable
decrease compared with the prior year is primarily due to
changes in the model mix and negative currency effects. Operating
profit was further reduced by increased marketing expenses and
expenses for the continuation of the comprehensive quality
offensive. In addition, average net assets increased due to the
business expansion at smart. The Chrysler Group’s RONA
increased from minus 4.4% in 2003 to plus 16.4% in 2004. This
substantial improvement was partially the result of lower net
assets, but in particular of increased unit sales, lower expendi-
tures for sales promotion actions and a shift in sales towards
vehicles with higher margins. The Commercial Vehicles Division
achieved a RONA of 13.8% and thus surpassed the minimum
required rate of return. The increased operating profit was due
not only to higher unit sales, but also to the effect of the effi-
ciency improving measures initiated by the division. At Financial
Services, lower risk costs and stable interest-rate margins led
to an increase in return on equity to 22.0% (2003: 17.7%) so that
the minimum required rate of return was again significantly
surpassed.
1.5
3.0
4.5
6.0
7.5
2004200320022001
9.0
in %
Return on Net Assets (RONA) DaimlerChrysler Group (after taxes)