Strategic control parameters

Control system and objectives
As part of its value-driven growth strategy, Vossloh's prime target is to add value, defined as premium 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) and WACC, the weighted average cost of capital (debt and equity). Cost of equity is composed of a risk-free rate plus a current premium of 5.0 percent; cost of debt is calculated on the basis of the Group’s average funding terms. The ratio of equity to interest-bearing debt, required to determine WACC, is two-thirds to one-third and is derived not from the balance sheet since it is not only predicated on a benchmark for the funding structure but also because equity is here based on fair value and not the recognized book value.

Multiplying the premium by average capital employed (CE) produces the value added (VA) in a period in absolute terms.

In fiscal 2010, the Group and its business units had to earn an 11-percent pretax WACC as the yield expected by investors and lenders. A groupwide sustainable ROCE of 15 percent has been set as value-oriented benchmark and relative performance indicator, the expected premium over pretax WACC hence being 4 percent in 2010 (related to capital employed). The clearly lower interest rates have leveled down risk-free rates from 4.25 to 3.25 percent and, therefore, Vossloh has as from 2011 downscaled the yield expected by lenders and investors to 10 percent while maintaining sustainable ROCE at an unchanged benchmark of 15 percent.

Besides the ROCE and VA benchmarks, Vossloh has defined additional financial targets for the Group in its entirety, basically

EBIT margin above 10 percent (after nonoperating one-time factors)
sustainable increase in earnings per share and commensurate cash dividends
in the medium term, a conservative net debt ceiling.