Earnings; Asset and Financial Position of the Bayer Group

Value-Based Performance

ROCE – a value-based indicator

The ROCE (return on capital employed) indicates the capital return over a specified period. It is the ratio of net operating profit after tax (NOPAT) to the average capital employed. NOPAT is determined by deducting from EBIT the income taxes thereon, which are based on a historical average tax rate of 24%. The capital employed reflects the amount of capital used in the company’s operations. Based on carrying amounts, it is calculated by subtracting from operational assets the liability items that are largely non-interest-bearing, such as trade accounts payable, or would distort the operational capital base. To reflect the change in the capital employed during the year, an average figure is determined from the amounts at the end of the previous year and the end of the year under report. See also A 2.4 “Alternative Performance Measures Used by the Bayer Group” for a definition of capital employed.

The ROCE is compared to the weighted average cost of capital (WACC), which corresponds to the return expected by the providers of equity and debt. If the ROCE is in line with the WACC, the expected return for the period has been achieved. If it exceeds the WACC, return expectations have been exceeded, indicating that value has been created.

Calculating the cost of capital

6.9%

Capital cost factor for the Bayer Group in 2017

The WACC is based on an after-tax approach and was calculated at the beginning of the year as the weighted average of the equity and debt cost factors. The cost of equity is the return expected by stockholders, computed from capital market information. The debt capital cost factor we use to calculate the WACC is based on the financing terms for ten-year Eurobonds issued by industrial companies with an “A–” credit rating. Historical capital market data is included in the data smoothing process to guarantee the necessary stability for internal management. The WACC for 2017 was 6.9% for the Bayer Group and the reporting segments. In impairment testing, by contrast, individual capital cost factors are used for the reporting segments which explicitly take account of segment-specific parameters (see Note “Basic principles, methods and critical accounting estimates”). However, these are not used for internal management, as they contain parameters relating to the closing date and therefore exhibit greater volatility than desired for internal management.

Value-based business development

10.8%

ROCE in 2017

Bayer’s ROCE in 2017 amounted to 10.8%, exceeding the cost of capital by 3.9 percentage points. It is thus an indicator for value creation. All segments except Consumer Health exceeded the WACC in 2017, although negative special items had a significant impact on the performance of all segments. Consumer Health’s performance continued to be mainly influenced by the high level of capital employed as a result of the 2014 acquisition of the consumer care business of Merck & Co., Inc., United States.

Value-Based Performance by Segment

 

 

Pharmaceuticals

 

Consumer Health

 

Crop Science

 

Animal Health

 

Group1

 

 

2016

2017

 

2016

2017

 

2016

2017

 

2016

2017

 

2016

2017

 

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

2016 figures restated

1

Including Reconciliation

2

24% on EBIT; based on historical average of tax rates

EBIT

 

3,389

4,325

 

695

518

 

1,755

1,235

 

313

307

 

5,738

5,903

Income taxes2

 

(813)

(1,038)

 

(167)

(124)

 

(421)

(296)

 

(75)

(74)

 

(1,377)

(1,417)

NOPAT

 

2,576

3,287

 

528

394

 

1,334

939

 

238

233

 

4,361

4,486

Average capital employed

 

15,866

15,630

 

15,226

14,404

 

10,316

9,814

 

375

495

 

42,318

41,600

ROCE

 

16.2%

21.0%

 

3.5%

2.7%

 

12.9%

9.6%

 

63.5%

47.1%

 

10.3%

10.8%

WACC

 

7.5%

6.9%

 

7.5%

6.9%

 

7.5%

6.9%

 

7.5%

6.9%

 

7.5%

6.9%

Compare to Last Year