Economic profit as earnings performance indicator
As in previous years, we present economic profit as an additional earnings performance indicator alongside EBIT in our value-based Group management system. Economic profit measures the value we create for shareholders in operating activities, taking into account the cost of capital employed.
The starting point for calculating economic profit is net operating profit after taxes. This consists of EBIT, net income from associates, net income from measurement of the Deutsche Postbank Group at equity and the interest component of operating lease expenses. Taking net operating profit after taxes and deducting the total cost of capital (weighted average cost of capital times average net assets employed) gives economic profit.
|
Economic profit (Postbank at equity) |
| ||||||
|---|---|---|---|---|---|---|---|
|
|
|
2006 |
2007 |
+/– % | |||
|
Net operating profit after taxes |
€m |
3,029 |
2,538 |
-16.2 | |||
|
Average net assets employed |
€m |
27,291 |
26,601 |
-2.5 | |||
|
x Weighted average cost of capital |
% |
5.9 |
6.7 |
| |||
|
– Total cost of capital |
€m |
-1,610 |
-1,782 |
10.7 | |||
|
= Economic profit |
€m |
1,419 |
756 |
-46.7 | |||
With economic profit at €756 million, the Group continued to create substantial value in 2007. Net operating profit after taxes was down on the previous year despite operational improvements. This was due to a €594 million non-cash write-down on EXPRESS Americas non-current assets. Average net assets employed decreased slightly, whilst the weighted average cost of capital sharply increased due to generally higher interest rates. As a result, economic profit dropped by 46.7% compared with the previous year. The weighted average cost of capital had already been set at 6.7% for the beginning of the year.
The weighted average cost of capital (WACC) represents the weighted average net cost of interest-bearing liabilities and equity, taking into account tax effects and sector-specific risk factors in a beta factor.
The average net assets employed figure used in economic profit calculations is determined as follows:
|
Average net assets employed (Postbank at equity) |
| |||
|---|---|---|---|---|
|
€m |
2006 |
2007 | ||
|
Segment assets |
30,642 |
30,266 | ||
|
– Segment liabilities including non-interest-bearing provisions |
-10,601 |
-10,883 | ||
|
= Segment net assets |
20,041 |
19,383 | ||
|
+ Investments in associates and the Deutsche Postbank Group |
1,674 |
1,865 | ||
|
+ Investment property |
50 |
115 | ||
|
+ Net present value of operating lease obligations |
4,863 |
5,211 | ||
|
= Net assets employed at end of year |
26,628 |
26,574 | ||
|
Net assets employed at end of previous year |
27,954 |
26,628 | ||
|
Average net assets employed |
27,291 |
26,601 | ||
