To make achievement of our growth targets measurable, we have adopted a modern system of metrics allowing us to calculate value-increase and return ratios in line with capital market practice.

We use economic value added (EVA®)1) as a central performance management parameter to assess growth to date and to appraise future plans. EVA® is a measure of the additional financial value created by a company in a given reporting period. A company creates economic value added if its operating profit exceeds its cost of capital, the latter being defined as the return on capital employed (ROCE) expected by the capital market.

Operational business performance is measured on the basis of operating profit (EBIT). The capital employed figure is calculated from the assets side of the balance sheet. A reconciliation of the year-end figures in the balance sheet to the average values used in determining capital employed can be found on page 115.

The cost of capital employed is calculated as a weighted average of the cost of capital (WACC) comprising both equity and debt. In fiscal 2007, we applied a WACC after tax of 7 percent. Before tax, the figure was 10 percent. We regularly review our cost of capital in order to reflect changing market conditions. Hence, due to the increase in interest rate levels, we are adopting a WACC value of 11 percent before tax and 7.5 percent after tax as from fiscal 2008.

Also effective 2008, we will be applying different WACC values depending on the business sector involved, based on sector-specific beta factors. This will result in a WACC before tax of 10.5 percent (7.5 percent after tax) for both Laundry & Home Care and Cosmetics/ Toiletries, and of 12.0 percent before tax (8.5 percent after tax) for Adhesive Technologies.

At Henkel, EVA® is calculated as follows:

EVA® = EBIT – (Capital Employed x WACC)

EVA® serves to promote value-adding decisions and profitable growth in all our business sectors. Operations exhibiting consistently negative value contributions with no prospect of positive EVA® values in the future are divested or otherwise discontinued.

In order to be better able to compare business units of varying size, we additionally apply return on capital employed, calculated as follows:

ROCE = EBIT / Capital Employed

ROCE represents the average return on capital employed. We create value where this metric exceeds the cost of capital.

EVA® and ROCE by business sector*