Annual Report 2017

Performance measurement system

Financial performance measures

The financial performance measures used at Daimler are oriented toward our investors’ interests and expectations. They provide the foundation for value-based management.

Value added

Value added is a key element of our performance measurement system, which is applied at both the Group and the divisional levels. It is calculated as the difference between operating profit and the cost of capital of the average net assets. Alternatively, the value added of the industrial divisions can be determined using the main value drivers of return on sales (quotient of EBIT and revenue) and net assets’ productivity (quotient of revenue and net assets).  (See graphic B.03)

Daimler AR2017 B.03 Calculation of value added

Using a combination of return on sales and net assets’ productivity within the context of a strategy of profitable revenue growth provides a basis for the positive development of value added. Value added shows the extent to which the Group and its divisions achieve or exceed investors’ minimum return requirements, thus creating additional value. The quantitative development of value added and the other financial performance measures is explained in the “Profitability” chapter. (Dividend)

Profit measure

The measure of operating profit at the divisional level is EBIT (earnings before interest and income taxes). EBIT thus reflects the divisions’ responsibility for profit and loss. The measure of operating profit that is used at the Group level is the 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. The latter include income taxes and other reconciliation items. (See table B.19 Net Operating Profit)

Net assets

Net assets are the basis for the investors’ required return. The industrial divisions are accountable for the net operating assets; all assets, liabilities and provisions for which they are responsible in day-to-day operations are therefore allocated to them. Performance measurement at Daimler Financial Services is implemented on an equity basis. Net assets at the Group level include the net operating 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 on the basis of average quarterly net assets. (See Value Added)

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 of the industrial divisions comprises the cost of equity as well as the costs of debt and net pension obligations of the industrial business. The expected returns on liquidity 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. Whereas the cost of debt is derived from the required rate of return for obligations the Group enters into with external lenders, the cost of capital for net 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. During the year under review, 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. (See table B.04)

B.04 Cost of capital

  2017 2016
In percent    
     
Group, after taxes 8 8
Industrial business, 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 net profitability and net assets’ productivity results in the return on net assets (RONA). If RONA exceeds the cost of capital, value is created for our shareholders. The measure of profitability for Daimler Financial Services is not return on sales, but return on equity.

Key performance indicators

The important financial indicators for measuring our operating financial performance, in addition to EBIT and revenue, are the free cash flow of the industrial business, investments, and expenditure for research and development. Along with the indicators of financial performance, we also use various non-financial indicators to help us manage the Group. Of particular importance in this respect are the unit sales of our automotive divisions, which we also use as the basis for our capacity and human resources planning and workforce numbers.

Non-financial performance indicators are also used to determine the remuneration of our Board of Management members. Important criteria for annual target achievement also include integrity and compliance, employee satisfaction and the high quality of our products.

Details of the development of non-financial performance indicators can be found in the chapters “Economic Conditions and Business Development” and “Non-Financial Report.” (See Economic Conditions and Business and Non-Financial Report

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