Controlling system
The most significant financial performance indicators for the Vossloh Group are value added, sales revenues, EBIT (earnings before interest and taxes) and EBIT margin (EBIT/sales revenues). While the company uses sales revenues, EBIT and EBIT margin as key performance indicators for short-term planning, the long-term management of the business units within the framework of the value-oriented growth strategy has a focus on value added in the foreground. Value added is the key earnings indicator for the divisions and business units within the framework of external reporting.
Positive value added is generated when a premium is earned on top of the return claimed by investors and lenders (cost of capital). This premium is the difference between the return on capital employed (ROCE, calculated as EBIT/average capital employed) and the cost of capital, which is calculated as the weighted average cost of equity and debt. Multiplying the premium by average capital employed (working capital plus fixed assets) gives the value added over a period in absolute terms. For internal controlling purposes, ROCE and value added are calculated before taxes.
Cost of equity is largely composed of a risk-free interest rate plus a market risk premium. The interest rate factor is adjusted according to the result before taxes. The borrowing costs result from the average financing conditions. The ratio of equity to interest-bearing debt used to determine the weighted average cost of capital is not derived from the balance sheet, as it is based on a target figure for the financing structure. Secondly, equity is not recognized at the carrying amounts in the balance sheet, but at target market values. A weighted average cost of capital before taxes (WACC) of 9.5 % was used as the yield expected by investors and lenders for the purposes of intragroup controlling in the 2024 fiscal year (previous year: 8.5 %).
There are basically two levers for increasing the value added: Increase in EBIT and optimization of tied-up capital (capital employed). ROCE is derived from both values. Vossloh seeks to improve the parameters it can influence to optimize this performance indicator. As a result, the company also focuses on working capital, working capital intensity (average working capital/annual revenue) and free cash flow.
Management uses nonfinancial performance indicators for the purpose of managing the company and making long-term strategic decisions. However, nonfinancial performance indicators are not primarily used to manage the company and are, therefore, not key performance indicators within the meaning of Sections 315 (3) and 289 (3) German Commercial Code (HGB). Instead, they provide information about the situation within the Group and are used as a basis for decisions. Nonfinancial performance indicators that are not primarily relevant to management are explained in the Group Sustainability Statement starting on page 68.
The management of Vossloh AG considers monthly financial reporting to be a central element for the ongoing analysis and control of the divisions, business units and the Group itself. To this end, the financial statements and key performance indicators prepared by the Group companies are consolidated and analyzed in the same way as the annual forecast updated each month. Deviations are investigated in relation to their impact on the financial targets. The monthly updates to annual projections are supplemented by risk reports that aim to identify any potential reductions or increases in assets. The effectiveness of measures aimed at ensuring targets are met is continuously analyzed. The figures of the operating units are intensively discussed by their respective management and the Executive Board with the involvement of the relevant central departments of Vossloh AG.