Mercedes 2012 Annual Report Download - page 90

95
3 | Management Report | Profitability
Financial performance measures
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.

3.19 For purposes of performance measure-
ment, Daimler differentiates between Group level and divi-
sional level. Value added is one element of the performance
measurement system at both levels and is calculated
as the difference between the operating result and the cost
of capital of the average net assets in that period.

3.16
Alternatively, the value added of the industrial divisions can be
determined by using the main value drivers: return on sales
(ROS, quotient of EBIT and revenue) and net assets productiv-
ity (quotient of revenue and net assets).

3.17
The use of ROS and net assets productivity within the context
of a revenue growth strategy 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.
Profit measure. The measure of operating profit at divisional
level is EBIT and 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.

3.20

3.22 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 mea-
surement 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 for which the divisions are not held accountable. Average
annual net assets are calculated from average quarterly
net assets, which are calculated as the average of net assets
at the beginning and the end of each quarter.
Cost of capital.

3.18 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. 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 expected return on the plan assets
of the pension funds is derived from the expected interest, divi-
dends and other income generated by the plan assets invested
to cover the pension obligations. 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.
Return on sales. As one of the main drivers of value added,
return on sales (ROS) is of particular importance for assessing
the industrial divisions’ profitability. The profitability measure
for Daimler Financial Services is not ROS, but return on equity
(ROE), in line with the usual practice in the banking business.