Return on investment (ROI) and value contribution

The central focus of the Volkswagen Group’s financial target system is to continuously and sustainably increase the value of the Company. In order to make efficient use of resources in the Automotive Division and to measure the success of this, we have been using a value-based management system for a number of years, with return on investment (ROI) as a relative indicator and value contribution¹, a key performance indicator linked to the cost of capital, as an absolute performance measure.

The return on investment serves as a constant target in strategic and operational management. If the return on investment exceeds the market cost of capital, there is an increase in the value of the invested capital and a positive value contribution. The concept of value-based management makes it possible to assess the success of the Automotive Division and individual business units. It also enables the earning power of our products, product lines and projects – such as new plants – to be measured.

Components of value contribution

Value contribution is calculated on the basis of the operating result after tax and the opportunity cost of invested capital.

The operating result shows the economic performance of the Automotive Division and is initially a pre-tax figure. Based on our companies’ income tax rates, which vary from country to country, we assume an overall average tax rate of 30% when calculating the operating result after tax.

The cost of capital is multiplied by the average invested capital to give the opportunity cost of capital. Invested capital is calculated as total operating assets reported in the balance sheet (property, plant and equipment, intangible assets, lease assets, inventories and receivables) less non-interest-bearing liabilities (trade payables and payments on account received). Average invested capital is derived from the balance at the beginning and the end of the reporting year.

As the concept of value-based management only comprises our operating activities, assets relating to investments in subsidiaries and associates and the investment of cash funds are not included when calculating invested capital. Interest charged on these assets is reported in the financial result.

Determining the current cost of capital

The cost of capital is the weighted average of the required rates of return on equity and debt.

The cost of equity is determined using the Capital Asset Pricing Model (CAPM). This model uses the yield on long-term risk-free Bunds, increased by the risk premium attaching to investments in the equity market. The risk premium comprises a general market risk and a specific business risk. The general risk premium of 7.5% reflects the general risk of a capital investment in the equity market. The specific business risk – price fluctuations in Volkswagen preferred shares – is modeled in comparison to the MSCI World Index when calculating the beta factor. The MSCI World Index is a global capital market benchmark for investors.

The analysis period for the beta factor calculation spans five years with annual beta figures calculated on a weekly basis followed by the subsequent calculation of the average. A beta factor of 1.13 (1.15) was determined for 2023.

The cost of debt is based on the average yield for long-term corporate bonds. As borrowing costs are tax-deductible, the cost of debt is adjusted to account for the tax rate of 30%.

A weighting on the basis of a fixed ratio for the fair values of equity and debt results in an effective cost of capital for the Automotive Division of 8.5 (8.3) % for 2023.

1 The value contribution corresponds to the Economic Value Added (EVA®). EVA® is a registered trademark of the consulting firm Stern Value Management.

Return on investment (ROI) and value contribution in the reporting year

At €15,218 (14,080) million for fiscal year 2023, the operating result after tax for the Automotive Division, including the proportionate operating result of the equity-accounted Chinese joint ventures, was up on the prior-year figure. Higher vehicle sales and improved price positioning were set against a rise in product costs (in particular for commodities). In addition, the fair value measurement of derivatives to which hedge accounting is not applied (especially commodity hedges) had a negative effect on the operating result in the reporting year (€−3.2 billion), in contrast to the prior-year period, when it had boosted earnings by €1.8 billion. The effect of purchase price allocation on earnings and assets is not taken into account as this cannot be influenced by management in the course of business operations.

At €123,887 (117,402) million, invested capital increased noticeably in the reporting year compared with the prior year. The return on investment (ROI) is the return on invested capital for a particular period based on the operating result after tax. Due to the improved operating result, the ROI of 12.3 (12.0)% exceeded both the prior-year figure and our minimum required rate of return on invested capital of 9%.

At €10,491 (9,701) million, the opportunity cost of capital – invested capital multiplied by the cost of capital – was noticeably up on the previous year. Improvements in the operating result after tax, net of the opportunity cost of invested capital, led to a positive value contribution of €4,727 (4,379) million.

More information on value-based management is contained in our publication entitled “Financial Control System of the Volkswagen Group”, which can be downloaded from our Investor Relations website: www.volkswagen-group.com/more-publications.