Management Report & Annexes | Report on Economic Position
16.4 Value Management
System based on cash value added
The principal value-based steering parameters in the Bayer Group are the cash value added (CVA) and the cash flow return on investment (CFROI). If the CVA is positive, the respective company or business entity has exceeded the minimum requirements of the equity and debt capital providers and has created value. The CFROI is a ratio indicating the profitability of the Group or of individual business entities and must be compared to the cost of capital.
Calculating the cost of capital
Bayer calculates the cost of capital according to the debt/equity ratio at the beginning of the year using the weighted average cost of capital (WACC) formula. The cost of equity capital is the return expected by stockholders, computed from capital market information. The cost of debt capital used in calculating WACC is based on the terms for ten-year Eurobonds issued by industrial companies with an “A–”rating.
To take into account the different risk and return profiles of our principal businesses, we calculate individual capital cost factors after income taxes for each of our subgroups. These were 7.9% (2012: 8.1%) for HealthCare, 7.3% for CropScience (2012: 7.5%) and 6.9% (2012: 7.1%) for MaterialScience. The capital cost factor for the Group in 2013 was 7.6% (2012: 7.8%).
Gross cash flow, cash value added and cash flow return on investment as performance yardsticks
The gross cash flow is the measure of our internal financing capability. Bayer has chosen this parameter because it is relatively free of accounting influences and is therefore a more meaningful performance indicator.
Taking into account the costs of capital and of reproducing depletable assets, we determine the gross cash flow hurdle. If the gross cash flow hurdle is exceeded, the CVA is positive and thus the required return on equity and debt plus the cost of asset reproduction has been earned.
The CFROI is the difference between the gross cash flow and the cost of reproducing depletable assets, divided by the capital invested. The capital invested is calculated from the statement of financial position and basically comprises the property, plant and equipment and intangible assets required for operations – stated at the historical cost of acquisition or construction – plus working capital, less interest-free liabilities (such as current provisions). To mitigate the effect of fluctuations in the capital invested during the year, the CFROI is computed on the basis of the average capital invested for the respective year.
The gross cash flow hurdle for 2013 was €4,260 million (2012: €4,337 million).
Actual gross cash flow came in at €5,832 million, exceeding the hurdle by 36.9%. Thus the entire cost of capital and asset reproduction costs were earned in 2013. The positive CVA of €1,572 million shows that Bayer exceeded the minimum return and reproduction requirements and created value. The CVA rose by a clear €1,353 million compared with 2012. The CFROI for 2013 amounted to 11.1% (2012: 8.2%).
HealthCare and CropScience exceeded their required returns (including asset reproduction), raised their CVA and helped to increase the value of the Group. At MaterialScience, capital expenditures for new production facilities form the basis for profitable growth in the future. This strategic investment is aligned to medium- and long-term market developments and is currently holding back this subgroup’s value management indicators.
|Value Management Indicators by Subgroup[Table 3.16.4]
|Gross cash flow* (GCF)
|Gross cash flow hurdle
|Cash value added (CVA)
|Cash flow return on investment (CFROI)
|Average capital invested
2012 figures restated
Delta cash value added is not listed due to its limited importance.
* For definition see Chapter 16.5 “Liquidity and Capital Expenditures of the Bayer Group.”