Corporate performance criteria, goals, and strategy

The Management Board controls the business segments by setting strategic and operative targets and through various financial ratios. In line with our growth strategy, organic growth is a key performance indicator. Operating income (EBIT – earnings before interest and taxes) is another useful yardstick for measuring the profitability of the business segments.

The Management Board believes that, in addition to operating income, EBITDA (earnings before interest and taxes, depreciation and amortization) is a good indicator of the business segments’ ability to achieve positive cash flows and to service their financial commitments. The criteria on which the Management Board measures the performance of the business segments are selected Group-wide in such a way that they include income and expenses within the control of these segments. We also control the operating cash flow contributions of our business segments on the basis of days sales outstanding (DSO) and scope of inventory (SOI).

Financing is a central Group function over which the business segments have no control. The financial targets for the business segments therefore exclude both interest payments resulting from financing activities and tax expenses.

Another key performance indicator at the Group level is the debt ratio, which is the ratio of net debt to EBITDA. This measure indicates how far a company is in a position to meet its payment obligations. The Group’s business segments hold important market positions, and operate in growing and mostly noncyclical markets. They generate stable, predictable, and sustainable cash flows since the majority of our customers are of high credit quality. The Group is therefore able to finance its growth with a high proportion of debt compared to companies in other sectors.

At Group level we use return on operating assets (ROOA) and return on invested capital (ROIC) as benchmarks for evaluating our business segments and their contribution to Group value added. Group ROIC rose to 8.9% (2009: 8.2%), and Group ROOA to 11.6% (2009: 10.5%). The marked improvement in these two ratios versus 2009 was mainly due to the very good earnings growth in all business segments. We expect a continuing improvement in ROIC and ROOA in the future.

The summary shows ROIC and ROOA by business segment:

  ROIC ROOA
in % 2010 2009 2010 2009
1 ROIC: Invested capital is insignificant due to prepayments, cash, and cash equivalents.
Fresenius Medical Care 8.8 8.5 12.5 12.2
Fresenius Kabi 9.0 7.8 11.9 10.2
Fresenius Helios 7.5 6.7 7.8 7.1
Fresenius Vamed1 22.2 22.8
Group 8.9 8.2 11.6 10.5

  ROIC ROOA
in % 2010 2009 2010 2009
1 ROIC: Invested capital is insignificant due to prepayments, cash, and cash equivalents.
Fresenius Medical Care 8.8 8.5 12.5 12.2
Fresenius Kabi 9.0 7.8 11.9 10.2
Fresenius Helios 7.5 6.7 7.8 7.1
Fresenius Vamed1 22.2 22.8
Group 8.9 8.2 11.6 10.5

We calculate our cost of capital as weighted average of the cost of equity and the cost of debt. The WACC (weighted average cost of capital) of Fresenius Medical Care and the WACC of the other business segments was 6.4% and 5.9% respectively in 2010, was clearly exceeded by Group ROIC of 8.9%.

Our investments are generally controlled using a detailed coordination and evaluation process. As a first step, the Management Board sets the Group’s investment targets and the budget based on investment proposals. In a second step, the respective business segments and an internal Acquisition & Investment Council (AIC) determine the individual projects and measures while taking into account the overall strategy, the total budget, and the required and potential return on investment. The investment projects are evaluated based on commonly used methods, such as internal rate of return (IRR) and net present value (NPV). The respective investment project is then finally submitted for approval to the executive committees or respective managements of the business segments, or to the Management Board of Fresenius Management SE or its Supervisory Board if the projects exceed a given size.

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