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Henkel Integrative Case: Part II
Reorganizing the Financials
Introduction
To prepare the financial statements for analysis of economic performance, you need to
reorganize the items on the balance sheet, income statement, and statement of cash flows into
three categories of components: operating, nonoperating, and sources of financing. This will
entail searching through the notes to separate accounts that aggregate operating and nonoperating
items. Although this task seems mundane, it is a crucial step in order to avoid the common traps
of double counting, omitting cash flows, or hiding leverage that artificially boosts reported
performance.
Instructions
In this assignment, we reorganize the financial statements for Henkel AG. To do this, proceed in
three steps.
1. Estimating operating profit: Start by determining operating profit. Our definition of
operating profit, which focuses on the ongoing profit related to operations, differs from
how Henkel defines operating profits. There are three major differences.
a. First, we need to separate “other operating income” and “other operating charges”
into operating and nonoperating items, since not all of their components are
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b. Second, adjust cost of sales, marketing, research and development (R&D), and
c. Since earnings before interest, taxes, and amortization (EBITA) should be
measured before amortization of intangibles, add back amortization to adjusted
2. Estimating operating taxes: Next, determine the operating tax rate. Apply the operating
tax rate to operating profit to determine after-tax operating profit. To find the operating
tax rate, proceed in three steps.
a. First, use the tax reconciliation table to determine the marginal tax rate. The
b. Next, apply the marginal tax rate to EBITA to determine statutory taxes on
c. Finally, segment the remaining tax items into operating taxes related to current,
ongoing core operations and nonoperating taxes. Similar to operating income,
3. Calculating invested capital and total funds invested: Next, reorganize the balance sheet
into invested capital, total funds invested, and sources of financing.
a. To determine invested capital, subtract operating liabilities (stakeholder capital)
from operating assets (used for core operations). Classify excess cash (cash
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b. To calculate total funds invested, add nonoperating assets to invested capital. For
4. To conclude the assignment, estimate return on invested capital. Estimate ROIC with and
without acquired intangibles. If the cost of capital of Henkel is 9 percent, is the company
creating value?
Helpful Page Locations, Henkel 2009 Annual Report
Other operating income can be found in note 6 on page 91.
Other operating charges can be found in note 7 on page 92.
Taxes on income (the tax reconciliation table) can be found in note 9 starting on page 92.
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