14.4 Value Management

System based on cash value added

The principal value-based steering parameters in the Bayer Group are the Cash value added (CVA) This is the difference between the gross cash flow and the gross cash flow hurdle. It is therefore the amount by which the gross cash flow exceeds the return and reproduction requirements. If CVA is positive, the investors’ return and reproduction requirements have been satisfied and value has been created for the company. (CVA) and the Cash flow Key indicator for assessing a company’s financial strength; in addition to gross cash flow, the statement of cash flows also reports the cash flow from operating activities (net cash flow), which shows the amount of funds available from operating activities for financing investments, repaying debts or distributing dividends. The cash flows from investing and financing activities are also reported. 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) The weighted average cost of capital (WACC) represents the return expected by investors on the capital invested in the company. It is computed as a weighted average of the cost of equity and debt. The cost of equity is derived from capital market information and represents the return expected by stockholders, while the cost of debt represents the conditions at which the company can borrow money over the long term. 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 the WACC is based on the terms for ten-year Eurobonds issued by industrial companies with an “A−” rating.

7.6% Cost of capital for the Bayer Group

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% for HealthCare, 7.3% for CropScience and 6.9% for Covestro. The capital cost factor for the Group as a whole in 2015 was 7.6%.

Gross cash flow, cash value added and cash flow return on investment as performance yardsticks

The Gross cash flow Income after income taxes, plus income taxes, plus financial result, minus income taxes paid or accrued, plus depreciation, amortization and impairment losses, minus impairment loss reversals, plus / minus changes in pension provisions, minus gains / plus losses on retirements of noncurrent assets, minus gains from the remeasurement of already held assets in step acquisitions; the change in pension provisions includes the elimination of noncash components of ebit. It also contains benefit payments during the year. This indicator is not defined in the International Financial Reporting Standards. 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 The GCF hurdle is the gross cash flow that needs to be generated to satisfy investors’ return and reproduction requirements. . 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 (CI) Capital invested comprises the assets on which the company must obtain a return by generating an appropriate cash inflow; in some cases, the cost of ultimately reproducing the assets must be earned in addition. . 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 is the difference between short-term current assets and short-term liabilities; it is calculated by deducting short-term liabilities from current assets (excluding cash and cash equivalents). In financial accounting, the change in working capital is one of the variables used to assess a company’s financial health. The objective of working capital management is to reduce working capital by minimizing the “financing gap” caused by the time lapse between the disbursement of funds (= payment for necessary raw materials) and the receipt of funds for the finished product. , 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 (CI) Capital invested comprises the assets on which the company must obtain a return by generating an appropriate cash inflow; in some cases, the cost of ultimately reproducing the assets must be earned in addition. for the respective year.

The Gross cash flow Income after income taxes, plus income taxes, plus financial result, minus income taxes paid or accrued, plus depreciation, amortization and impairment losses, minus impairment loss reversals, plus / minus changes in pension provisions, minus gains / plus losses on retirements of noncurrent assets, minus gains from the remeasurement of already held assets in step acquisitions; the change in pension provisions includes the elimination of noncash components of ebit. It also contains benefit payments during the year. This indicator is not defined in the International Financial Reporting Standards. hurdle for 2015 was €5,714 million.

Actual gross cash flow came in at €6,999 million, exceeding the hurdle by 22.5%. Thus the entire cost of capital and asset reproduction costs were earned in 2015. The positive CVA of €1,285 million shows that Bayer exceeded the minimum return and reproduction requirements and created value. A CFROI of 9.6% was achieved in 2015.

Despite negative impact from special items in some cases, all the subgroups exceeded their required returns (including asset reproduction), achieved a positive CVA and thus helped to increase the company’s value.

Value Management Indicators by Subgroup

 

 

HealthCare

 

CropScience

 

Covestro

 

Bayer Group

 

 

2014

2015

 

2014

2015

 

2014

2015

 

2014

2015

 

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

2014 figures restated

1

For definition see Chapter 14.5 “Liquidity and Capital Expenditures of the Bayer Group.”

Gross cash flow1 (GCF)

 

3,898

4,121

 

1,835

1,941

 

961

1,113

 

6,707

6,999

Gross cash flow hurdle

 

2,369

3,378

 

902

1,058

 

1,025

1,092

 

4,421

5,714

Cash value added (CVA)

 

1,529

743

 

933

883

 

(64)

21

 

2,286

1,285

Cash flow return on investment (CFROI)

 

13.1%

9.7%

 

15.3%

14.8%

 

6.0%

7.0%

 

11.7%

9.6%

WACC

 

7.9%

7.9%

 

7.3%

7.3%

 

6.9%

6.9%

 

7.6%

7.6%

Average capital invested

 

26,634

37,919

 

10,841

11,813

 

10,524

11,156

 

48,784

61,699