A2. Use of non-International Financial Reporting Standards (IFRS) performance measures

RETURN MEASURES	Return is a financial term that describes how must the value of an asset changes from an earlier point in time
Non-IFRS performance measure	Description	Reason for use of the measure
Return on capital employed, ROCE	Accumulated return on capital employed is calculated as 12-month rolling operating profit before amortization of acquisition-related intangible assets/EBITA as a percentage of an average of capital employed during the five most recent quarters. The corresponding key figure for a single quarter is calculated as EBITA for the quarter multiplied by four as a percentage of capital employed for the two most recent quarters.	A central ratio for measuring return on capital tied up in operations.
Adjusted return on capital employed, ROCE	Accumulated return on capital employed is calculated as 12-month rolling operating profit before amortization of acquisition-related intangible assets/EBITA, excluding items affecting comparability, as a percentage of an average of capital employed during the five most recent quarters. The corresponding key figure for a single quarter is calculated as EBITA for the quarter, excluding items affecting comparability, multiplied by four as a percentage of capital employed for the two most recent quarters.	A central ratio for measuring return on capital tied up in operations.

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SEKm	2017	2016	2015
ADJUSTED RETURN ON CAPITAL EMPLOYED, ROCE
EBITA	12,550	9,347	10,311
Items affecting comparability	855	2,645	292
Adjusted EBITA	13,405	11,992	10,603
Average capital employed	90,167	73,145	70,115
Adjusted return on capital employed, ROCE	14.9%	16.4%	15.1%

CAPITAL MEASURES	Shows how capital is utilized and the company’s financial strength
Non-IFRS performance measure	Description	Reason for use of the measure
Return on equity	For the Group, return on equity is calculated as profit for the period as a percentage of average equity.	Shows, from a shareholder perspective, the return that is generated on the owners’ capital that is invested in the company.
Adjusted return on equity	For the Group, adjusted return on equity is calculated as profit for the period as a Percentage of average equity.	Shows, from a shareholder perspective, the return that is generated on the Owners’ capital that is invested in the company.
Equity	The equity reported in the consolidated balance sheet consists of taxed equity increased by the equity portion of the Group’s untaxed reserves and non-controlling interests. Deferred tax liability in untaxed reserves has been calculated at a 22.0% rate for Swedish companies and at the applicable tax rate for foreign companies in each country outside Sweden.	Equity is the difference between the Group’s assets and liabilities, which corresponds to the Group’s equity contributed by owners and the Group’s accumulated profits.
Equity per share	Equity in relation to the average number of shares outstanding that exist in Essity Aktiebolag (publ).	A measure of the amount of equity that exists per share and is used for measuring the share against the share price.
Equity/assets ratio	Equity expressed as a percentage of total assets.	A traditional measure for showing financial risk, expressing the percentage of total assets that is financed by the owners.
Capital employed	The Group’s and business areas’ capital employed is calculated as the balance sheet’s total assets, excluding interest-bearing assets and pension assets, less total liabilities, excluding interest-bearing liabilities and pension liabilities.	This measure shows the amount of total capital that is used in the operations and is thus one of the components for measuring the return from operations.

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SEKm	2017	2016	2015
CAPITAL EMPLOYED
Total assets	147,016	114,284	115,351
Financial assets	–6,912	–6,973	–18,577
Non-current, non-interest-bearing liabilities	–8,650	–5,399	–4,788
Current, non-interest-bearing liabilities	–29,417	–27,159	–24,653
Capital employed	102,037	74,753	67,333

CAPITAL EMPLOYED
Personal Care	39,447	13,665	13,149
Consumer Tissue	43,569	40,082	40,903
Professional Hygiene	20,034	21,253	14,151
Other	–1,013	–247	–870
Capital employed	102,037	74,753	67,333

Non-IFRS performance measure	Description	Reason for use of the measure
Capital turnover	Net sales for the year divided by average capital employed.	Shows in a clear manner how effectively capital is employed. Together with sales growth and the operating margin, the capital turnover ratio is a key measure for monitoring value creation.
Working capital	The Group’s and business areas’ working capital is calculated as current operating receivables less current operating liabilities.	This measure shows how much working capital that is tied up in the operations and can be put in relation to sales to understand how effectively tied-up working capital is used.

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SEKm	2017	2016	2015
WORKING CAPITAL
Inventories	13,739	10,944	11,229
Trade receivables	17,607	15,843	14,808
Other current receivables	2,549	2,390	2,266
Trade payables	–14,748	–12,972	–11,869
Other current liabilities	–12,569	–11,863	–11,086
Other	–677	–199	–183
Working capital	5,901	4,143	5,165

Non-IFRS performance measure	Description	Reason for use of the measure
Net debt	The sum of consolidated interest-bearing liabilities, including pension liabilities and accrued interest less pension assets, cash and cash equivalents and interest-bearing current and non-current receivables and capital investment shares.	Net debt is the most relevant measure for showing the company’s total debt financing.

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SEKm	2017	2016	2015
NET DEBT
Surplus in funded pension plans	1,148	335	35
Non-current financial assets	552	717	731
Current financial assets	1,105	1,677	12,983
Cash and cash equivalents	4,107	4,244	4,828
Financial assets	6,912	6,973	18,577
Non-current financial liabilities	47,637	31,299	21,463
Provisions for pensions	4,541	5,273	2,919
Current financial liabilities	7,201	5,574	13,253
Financial liabilities	59,379	42,146	37,635
Net debt	52,467	35,173	19,058

Non-IFRS performance measure	Description	Reason for use of the measure
Debt/equity ratio	Expressed as net debt in relation to equity.	Helps show financial risk and is the most useful measure for management to monitor the level of the company’s indebtedness.
Debt payment capacity	Expressed as cash surplus in relation to closing net debt.	A financial measure that shows the company’s capacity to repay its debt.
Interest coverage ratio	Calculated according to the net method where operating profit is divided by financial items.	This ratio indicates a company’s ability to cover its interest expenses.

PERFORMANCE MEASURES	Various types of performance measures and margin measures expressed as a percentage of sales
Non-IFRS performance measure	Description	Reason for use of the measure
Organic sales	Sales growth excluding exchange rate effects, acquisitions and divestments.	This measure is of major importance for management in its monitoring of underlying sales driven by changes in volume, price and product mix for comparable units between different periods.

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SEKm	2017	2016	2015
ORGANIC SALES
Personal Care
Organic sales	586	865	2,282
Exchange rate effects	48	–1,313	1,015
Acquisitions/Divestments	6,301	–245	–18
Recognized change	6,935	–693	3,279

Consumer Tissue
Organic sales	231	1,110	2,183
Exchange rate effects	223	–1,207	2,423
Acquisitions/Divestments	0	0	0
Recognized change	454	–97	4,606

Professional Hygiene
Organic sales	411	708	405
Exchange rate effects	137	–168	2,179
Acquisitions/Divestments	150	2,934	0
Recognized change	698	3,474	2,584

Group
Organic sales	1,169	2,718	4,923
Exchange rate effects	406	–2,688	5,617
Acquisitions/Divestments	6,452	2,689	–18
Recognized change	8,027	2,719	10,522

ORGANIC SALES, %	2017	2016	2015
Previous period sales	101,238	98,519	87,997
Organic sales growth	1,169	2,718	4,923
Total organic sales for the period	102,407	101,237	92,920
Organic sales, %	1%	3%	6%

Non-IFRS performance measure	Description	Reason for use of the measure
Adjusted gross profit	Net sales minus cost of goods sold excluding items affecting comparability.	Adjusted gross profit is stripped of items affecting comparability and is thus a better measure than gross profit for showing the company’s earnings before the effect of costs such as selling and administrative costs.
Operating surplus margin	Operating surplus as a percentage of net sales for the year.	This measure is a complement to operating margin, as it shows the cash surplus in relation to net sales.
Operating profit before amortization of acquisition-related intangible assets/EBITA	Calculated as operating profit after depreciation of tangible assets but before amortization of acquisition-related intangible assets.	The measure is a good complement to enable earnings comparisons with other companies, regardless of whether business activities are based on acquisitions or organic growth.
Adjusted operating profit before amortization of acquisition-related intangible assets/EBITA	Calculated as operating profit after depreciation of tangible assets but before amortization of acquisition-related intangible assets, excluding items affecting comparability.	The measure is a good complement to enable earnings comparisons with other companies, regardless of whether business activities were based on acquisitions or organic growth, and even adjusted for the impact of items affecting comparability.

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SEKm	2017	2016	2015
Adjusted operating profit before amortization of acquisition-related intangible assets/EBITA
Operating profit	11,905	9,008	9,684
Amortization of acquisition-related intangible assets	560	159	133
Items affecting comparability, amortization of acquisition-related intangible assets	85	180	494
Operating profit before amortization of acquisition-related intangible assets/EBITA	12,550	9,347	10,311
EBITA margin	11.5%	9.2%	10.5%
Items affecting comparability, cost of goods sold	509	532	267
Items affecting comparability, sales, general and administration	346	2,113	25
Adjusted operating profit before amortization of acquisition-related intangible assets/EBITA	13,405	11,992	10,603
Adjusted EBITA margin	12.3%	11.8%	10.8%

Non-IFRS performance measure	Description	Reason for use of the measure
Items affecting comparability	Under items affecting comparability, Essity includes costs in connection with acquisitions, restructuring, impairment and other specific events.	Separate reporting of items affecting comparability between periods provides a better understanding of the company’s operating activities.
Restructuring costs	Costs for impairment together with personnel costs in connection with restructuring.	This measure shows the specific costs that have arisen in connection with restructuring of a specific operation, which contributes to a better understanding of the underlying cost level in the continuing operations.
Adjusted gross margin	Relates to adjusted gross profit as a percentage of net sales for the period.	Adjusted gross margin is stripped of items affecting comparability and is thus a better measure than gross margin for showing the company’s margins before the effect of costs such as selling and administrative costs.
EBITA margin	Operating profit before amortization of acquisition-related intangible assets as a percentage of net sales for the period.	The measure is a good complement to enable margin comparisons with other companies, regardless of whether business activities are based on acquisitions or organic growth.
Adjusted EBITA margin	Operating profit before amortization of acquisition-related intangible assets, excluding items affecting comparability, as a percentage of net sales for the year.	The measure is a good complement to enable margin comparisons with other companies, regardless of whether business activities are based on acquisitions or organic growth.
Operating margin	Operating profit as a percentage of net sales for the year.	The operating margin is a key measure together with sales growth and capital turnover ratio for monitoring value creation.
Adjusted operating margin	Operating proﬁt, excluding items affecting comparability, as a percentage of net sales for the year.	Adjusted operating margin is key measure together with sales growth and capital turnover ratio for monitoring value creation.
Adjusted operating profit	Calculated as operating profit before financial items and tax, excluding items affecting comparability.	Adjusted operating profit is a key ratio for control of the Group’s profit centers and provides a better understanding of earnings performance of the operations than the non-adjusted operating profit.

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SEKm	2017	2016	2015
ADJUSTED OPERATING PROFIT
Operating profit	11,905	9,008	9,684
Items affecting comparability	940	2,825	786
Adjusted operating profit	12,845	11,833	10,470
Adjusted operating margin	11.8%	11.7%	10.6%

Non-IFRS performance measure	Description	Reason for use of the measure
Financial net margin	Net financial items divided by net sales.	This measure shows the relationship between net financial items and net sales.
Adjusted profit before tax	Calculated as profit before tax, excluding items affecting comparability.	This is a useful measure for showing total profit for the company including financing, but not affected by taxes and items that affect comparability with previous periods.
Adjusted tax	Tax expenses for the period adjusted for tax expenses relating to items affecting comparability.	A useful measure to show the total tax expense for the period, adjusted for taxes related to items affecting comparability.

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SEKm	2017	2016	2015
ADJUSTED TAX
Tax	–1,938	–3,931	–2,278
Tax relating to items affecting comparability	–253	–424	–467
Adjusted tax	–2,191	–4,355	–2,745

Non-IFRS performance measure	Description	Reason for use of the measure
Adjusted profit for the period	Profit for the period after deducting items affecting comparability.	Shows the period’s total earnings capacity.
Net margin	Profit for the period as a percentage of net sales for the year.	The net margin shows the remaining share of net sales after all of the company’s costs, including income tax, have been deducted.
Earnings per share	Profit for the period attributable to owners of the Parent divided by the number of shares outstanding.	Earnings per share is a good measure of the company’s profitability and is used to determine the value of a company’s outstanding shares.
Adjusted earnings per share	Adjusted earnings for the period attributable to owners of the Parent, excluding amortization of acquisition-related intangible assets after tax divided by number of shares.	Adjusted earnings per share is a good measure of the company’s profitability and is used to determine the value of a company’s outstanding shares.

CASH FLOW PERFORMANCE MEASURES	Various performance measures and costs that have impacted the company’s cash flow
Non-IFRS performance measure	Description	Reason for use of the measure
Operating cash surplus	Calculated as operating profit with a reversal of depreciation, amortization and impairment of tangible and intangible assets Share of profits of associates and joint ventures, items affecting comparability and capital gains/losses are excluded.	This measure shows the cash flow generated by profit and is part of the follow-up of cash flow.
Operating cash flow	Consists of the sum of operating cash surplus and change in working capital, with deductions for current capital expenditures in non-current assets and restructuring costs.	This is an important control measure used internally within the organization that shows the combined cash flow from operating activities including all parts that the units have control over themselves.

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SEKm	2017	2016	2015
OPERATING CASH FLOW
Personal Care
Operating cash surplus	7,238	5,314	5,018
Change in working capital	–237	289	–314
Current capital expenditures	–1,282	–805	–840
Restructuring costs, etc.	–266	–75	–72
Operating cash flow	5,453	4,723	3,792

Consumer Tissue
Operating cash surplus	6,163	6,455	5,845
Change in working capital	–425	891	–130
Current capital expenditures	–1,749	–1,892	–1,437
Restructuring costs, etc.	–139	–255	–174
Operating cash flow	3,850	5,199	4,104

Professional Hygiene
Operating cash surplus	5,649	5,515	4,858
Change in working capital	73	–30	–155
Current capital expenditures	–719	–1,267	–823
Restructuring costs, etc.	–592	–83	–317
Operating cash flow	4,411	4,135	3,563

Non-IFRS performance measure	Description	Reason for use of the measure
Cash flow from current operations	Operating cash flow less net financial items and tax payments and taking into account other financial cash flow.	This measure illustrates the cash flow generated by operations and that can potentially be used for strategic initiatives such as strategic capital expenditures or acquisitions.
Strategic capital expenditures in non-current assets	Strategic capital expenditures increase the company’s future cash flow through capital expenditures to expand facilities, or new technologies that boost competitiveness.	Shows that size of the capital expenditures that are made in expansion and other growth measures.
Current capital expenditures	Investments to maintain competitiveness, such as maintenance, rationalization and replacement measures or investments of an environmental nature.	Shows the size of the capital expenditures required to maintain existing manufacturing capacity.

Calculation of performance measures not included in IFRS framework