Return on sales (ROS) – the ratio of operating result to total revenues – and underlying free cash flow on revenues (FCR) are currently the two key financial performance indicators that the divisions use to steer their business. We also use them for short- and long-term internal target agreements.
ROS declined from 12.0% in 2010 to 9.6% in 2011. Despite increased total revenues, return on sales declined in both the Pharmaceuticals and Chemicals business sectors. This was attributable to a significant decrease in the operating result due to higher operating costs, but mainly also owing to one-time expenses in connection with impairment losses in the Merck Serono division.
FCR also fell short of the good previous year’s level of 18%, decreasing to 13.6% in 2011. Both indicators, ROS and FCR, are presented by division in the Segment Reporting.
Earnings before interest, taxes, depreciation and amortization (EBITDA) is also a key financial indicator for Merck that will become increasingly important in the future. For EBITDA, as per the definition, depreciation and amortization of non-current assets are added back to earnings before interest and taxes (EBIT). Since the acquisitions of Serono and Millipore, amortization of intangible assets has been significantly lowering the operating result. When high impairment losses are also incurred, as was the case in 2011, the operating result alone does not reflect the actual earning power of the business. EBITDA increased in 2011 by 11% to € 2,736 from € 2,457 million in 2010.