HOCHTIEF Anual report 2008
 

Measuring Return on Capital:
Return on Net Assets

Financial control system creates Group-wide transparency

The goal of continuous value growth is a key element of our strategy. To achieve it, we deploy a value-driven management system that allows us to keep the Group portfolio rigorously on target.

Our return on net assets (RONA) performance metric makes value growth measurable, ensuring transparency across the full range of reporting levels and throughout the Group. It is integrated into all planning and reporting systems and also feeds into portfolio and investment decisions pointing the way forward. Value-based performance measures are used alongside indicators focusing on earnings and cash flow as key components of a financial control system that creates Group-wide transparency and lays the foundations for profitable growth.

Value-driven management is fostered by making value created an integral parameter in the management compensation system. By building targets for value created directly into the components of performance-linked compensation, we keep management motivation closely aligned with Group and shareholder interests.

Return on Net Assets (RONA)

The two main control parameters relating to return on capital are RONA and value created.

If RONA exceeds weighted average cost of capital (WACC), value created is positive, which means the Group is generating value. Expressed in absolute terms, value created is RONA, minus WACC, times average net assets.

RONA is return as a percentage of net assets and indicates how well HOCHTIEF's assets are performing as an investment. Return is defined for this purpose as operating earnings (EBITA, shown in the Operational Statement of Earnings) plus interest income from the Group's financial assets.

The net assets figure reflects the total capital commitment from which returns are to be generated. Net assets can be calculated starting from the assets side or the liabilities side of the balance sheet.

For divisional management purposes, net assets are determined starting from the assets side by taking total assets and deducting non-interest-bearing liabilities.

The assets-side calculation is useful for watching over operating activities as it highlights accounting parameters that operational managers must aim to optimize, such as trade accounts receivable, trade accounts payable and liquidity.

For the HOCHTIEF Group's external reporting purposes, net assets are determined from figures on the liabilities side of the balance sheet. Net assets are obtained in a simple and easy-to-follow calculation by adding interest-bearing liabilities items on the published balance sheet (shareholders' equity, pension provisions, and financial liabilities). Since RONA is calculated on a pre-tax basis, deferred taxes are eliminated from the net assets figure to remove tax effects.

Cost of capital*

Cost of capital is calculated on a weighted average basis. A number of parameters in the equation were reviewed in the year under review. Favorable effects of a German corporate tax reform resulting in a drop in cost of capital were canceled out by a higher figure for required return on equity. Following adjustments in various parameters, the Group"s weighted average cost of capital (WACC) stands at ten percent before tax, which is identical in absolute terms to the prior year. The factors affecting cost of capital are regularly checked and revised in line with changes in the market environment.


 
HOCHTIEF Anual report 2008 | Copyright 2009 HOCHTIEF