Novo Nordisk A/S – Annual report – 31 December 2023
Industry: pharmaceuticals
Non-IFRS financial measures
(part of the Management review – not audited)
In the Annual Report, Novo Nordisk discloses certain financial measures of the Group’s financial performance, financial position and cash flows that reflect adjustments to the most directly comparable measures calculated and presented in accordance with IFRS. These non-IFRS financial measures may not be defined and calculated by other companies in the same manner, and may therefore not be comparable.
The non-IFRS financial measures presented in the Annual Report are:
- Net sales and operating profit in constant exchange rates (CER)
- ‘Net profit’, adjusted for ‘income taxes’, ‘financial items’, ‘depreciation and amortisation’ and ‘impairment losses’ (EBITDA)
- Return on invested capital (ROIC)
- Free cash flow
- Cash to earnings
IFRS refers to an IFRS financial measure.
Sales and operating profit growth in constant exchange rates
‘Growth in constant exchange rates’ means that the effect of changes in exchange rates is excluded. It is defined as sales/operating profit for the period measured at the average exchange rates for the same period of the prior year, compared with net sales/operating profit for the same period of the prior year. Price adjustments within hyperinflation countries as defined in IAS 29 ‘Financial reporting in hyperinflation economies’ are excluded from the calculation to avoid growth in constant exchange rates being artificially inflated. Growth in constant exchange rates is considered to be relevant information for investors in order to understand the underlying development in sales and operating profit by adjusting for the impact of currency fluctuations.
Earnings before interest, taxes, depreciation, amortisation and impairment losses (EBITDA)
EBITDA is defined as ’net profit’, before ‘income taxes’, ‘financial items’, ‘depreciation and amortisation’ and ‘impairment losses’.
Management believes EBITDA is a useful measure as it helps analyse operating results from core business operations without including the effects of capital structure, tax rates, depreciation, amortisation and impairment losses.
The following table shows a reconciliation of EBITDA with operating profit, the most directly comparable IFRS financial measures:
Return on invested capital (ROIC)
ROIC is defined as ‘operating profit after tax’ (using the effective tax rate) as a percentage of average inventories, receivables, property, plant and equipment, intangible assets and deferred tax assets, less non-interest-bearing liabilities including provisions and deferred tax liabilities (where the average is the sum of the above assets and liabilities at the beginning of the year and at year-end divided by two).
Management believes ROIC is a useful measure in providing investors and Management with information regarding the Group’s performance. The calculation of this financial target is a widely accepted measure of earnings efficiency in relation to total capital employed.
The following tables show the reconciliation of ROIC with operating profit/equity in %, the most directly comparable IFRS financial measure:
Free cash flow
Free cash flow is a measure of the amount of cash generated in the period which is available for the Board to allocate between Novo Nordisk’s capital providers, through measures such as dividends, share repurchases and repayment of debt (excluding lease liability repayments) or for retaining within the business to fund future growth.
The following table shows a reconciliation of free cash flow with net cash generated from operating activities, the most directly comparable IFRS financial measure:
Cash to earnings
Cash to earnings is defined as ‘free cash flow as a percentage of net profit’.
Management believes that cash to earnings is an important performance metric because it measures the Group’s ability to turn earnings into cash. Since Management wants this measure to capture the ability of the Group’s operations to generate cash, free cash flow is used as the numerator instead of net cash flow.
The following table shows the reconciliation of cash to earnings to cash flow from operating activities/net profit in %, the most directly comparable IFRS financial measure:
Accounts examples 