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Last Update:
Mar. 10, 2011
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Part of the audited Consolidated Financial Statements and Management´s Analysis

Value-based management

We earn a premium on our cost of capital

“We earn a premium on our cost of capital” is one of the four pillars of our strategy. To create value and survive in the long term, a company’s earnings must exceed the costs of stockholders’ equity and debt capital. To secure BASF’s sustainable success, we encourage all employees to think and act entrepreneurially within the framework of our value-based management concept. Our goal: to create awareness about how every employee can find value-oriented solutions and implement these in an efficient and effective manner in day-to-day business.

EBIT after cost of capital

Earnings before interest and taxes (EBIT) after cost of capital is the key performance and management indicator for our operating divisions and business units. This figure takes into account that BASF’s shareholders and creditors expect a return on the capital they provide. The BASF Group creates added value only when EBIT at least covers the cost of capital.

EBIT after cost of capital (million €)
Five-year-summary1

EBIT after cost of capital (bar chart)

1 Since January 1, 2008, Group corporate costs are no longer allocated to the segments, but rather reported under Other. The previous years’ figures were not adjusted.

Calculation of the cost of capital percentage

The cost of capital percentage depends primarily on three factors:

  • the capital structure of the BASF Group,
  • the level of interest rates on debt, and
  • the return expected by shareholders.

Borrowing costs comprise interest payments for bank loans and liabilities to the capital markets. The cost of equity corresponds to the returns expected by providers of equity. This is determined by the market value of BASF shares and with the help of the Capital Asset Pricing Model (CAPM).

An EBIT threshold is determined based on the cost of capital and income taxes. The BASF Group’s operating units need to reach this threshold in order to earn the cost of capital. The cost of capital percentage is the relationship between this minimum EBIT level and the BASF Group’s operating assets. In 2010, the cost of capital percentage was 9%. For 2011, it has been raised to 11% due to the increase in the market capitalization of BASF shares.

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Calculation of EBIT after cost of capital (million €)

 

 

 

2010

2009

1

The projected net expense is already provided for by an increase in the cost of capital percentage.

2

In 2009 and 2010, the cost of capital percentage was 9%.

EBIT BASF Group

7,761

3,677

less EBIT for activities not assigned to the segments1

(707)

(627)

less non-compensable foreign income taxes for oil production

983

870

less cost of capital2

3,985

3,660

EBIT after cost of capital

3,500

(226)

Value-based management throughout the company

Value-based management is only successful if it is firmly rooted in the company and rigorously applied. For us, value-based management is therefore the daily value-based actions of all our employees. In accordance with our four strategic guidelines, we have identified value drivers – factors that show how each individual business unit can create value. We develop key figures for the individual value drivers that help us to plan and pursue changes.

An important factor in ensuring the successful implementation of value-based management is achieved by linking the goals of BASF to the individual target agreements of employees. In the operating units, achievement of positive EBIT after cost of capital is the most important performance indicator. In contrast, the highest priority in the functional units is placed on value contribution, evaluated on the basis of effectiveness and efficiency.

On the basis of our value-based management concept, all employees can make a contribution in their business to help ensure that we earn a premium on our cost of capital. Around the world, we raise awareness of this topic among our team through numerous training programs, thereby promoting more entrepreneurial thinking at all levels within BASF.

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