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

RETURN MEASURES	Return is a financial term that describes how much 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, excluding items affecting comparability.

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SEKm	2018	2017	2016
ADJUSTED RETURN ON CAPITAL EMPLOYED, ROCE
EBITA	11,560	12,550	9,347
Items affecting comparability	1,375	855	2,645
Adjusted EBITA	12,935	13,405	11,992
Average capital employed	107,575	90,167	73,145
Adjusted return on capital employed, ROCE	12.0%	14.9%	16.4%

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, excluding items affecting comparability, as a percentage of average equity.	Shows, from a shareholder perspective, the return excluding items affecting comparability 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. The deferred tax liability in untaxed reserves has been calculated on the basis of the corporate tax rate that has been approved and will take effect given that the reserves are expected to be realized.	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	2018	2017	2016
CAPITAL EMPLOYED
Total assets	154,266	147,016	114,284
Financial assets	–5,181	–6,912	–6,973
Non-current, non-interest-bearing liabilities	–9,037	–8,650	–5,399
Current, non-interest-bearing liabilities	–30,745	–29,417	–27,159
Capital employed	109,303	102,037	74,753

CAPITAL EMPLOYED
Personal Care	41,768	39,447	13,665
Consumer Tissue	44,915	43,569	40,082
Professional Hygiene	22,153	20,034	21,253
Other	467	–1,013	–247
Capital employed	109,303	102,037	74,753

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	2018	2017	2016
WORKING CAPITAL
Inventories	15,234	13,739	10,944
Trade receivables	18,687	17,607	15,843
Other current receivables	2,599	2,549	2,390
Trade payables	–15,911	–14,748	–12,972
Other current liabilities	–12,792	–12,569	–11,863
Other	–249	–677	–199
Working capital	7,568	5,901	4,143

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.	Net debt is the most relevant measure for showing the company’s total debt financing.

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SEKm	2018	2017	2016
NET DEBT
Surplus in funded pension plans	1,117	1,148	335
Non-current financial assets	634	552	717
Current financial assets	422	1,105	1,677
Cash and cash equivalents	3,008	4,107	4,244
Financial assets	5,181	6,912	6,973
Non-current financial liabilities	43,500	47,637	31,299
Provisions for pensions	5,258	4,541	5,273
Current financial liabilities	10,827	7,201	5,574
Financial liabilities	59,585	59,379	42,146
Net debt	54,404	52,467	35,173

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.
Net debt/EBITDA	Calculated as the closing balance of net debt in relation to 12 months rolling EBITDA.	A financial measure that shows the company’s capacity to repay its debt.
Net debt/Adjusted EBITDA	Calculated as the closing balance of net debt in relation to 12 months rolling EBITDA, excluding items affecting comparability.	A financial measure that shows the company’s capacity to repay its debt, adjusted for the impact of items affecting comparability.
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 net sales	The change in total organic sales for the period compared with the preceding period excluding exchange rate effects and effects from acquisitions and disposals.	This measure is of major importance for management in its monitoring of underlying net sales driven by changes in volume, price and product mix for comparable units between different periods.

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SEKm	2018	2017	2016
ORGANIC NET SALES
Personal Care
Organic net sales	1,213	586	865
Exchange rate effects	1,173	48	–1,313
Acquisitions/Divestments	2,371	6,301	–245
Recognized change	4,757	6,935	–693

Consumer Tissue
Organic net sales	1,089	231	1,110
Exchange rate effects	1,832	223	–1,207
Acquisitions/Divestments	190	0	0
Recognized change	3,111	454	–97

Professional Hygiene
Organic net sales	516	411	708
Exchange rate effects	780	137	–168
Acquisitions/Divestments	22	150	2,934
Recognized change	1,318	698	3,474

Group
Organic net sales	2,868	1,169	2,718
Exchange rate effects	3,785	406	–2,688
Acquisitions/Divestments	2,582	6,452	2,689
Recognized change	9,235	8,027	2,719

ORGANIC NET SALES, %	2018	2017	2016
Previous period sales	109,265	101,238	98,519
Organic net sales	2,868	1,169	2,718
Total organic sales for the period	112,133	102,407	101,237
Organic net sales, %	2.6%	1%	3%

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.	Gross profit shows the company’s earnings before the effects of selling and administrative costs. Adjusted gross profit excludes items affecting comparability.
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 depreciation, amortization and impairment of property, plant and equipment and intangible assets/EBITDA.	Calculated as operating profit before depreciation, amortization and impairment of property, plant and equipment and intangible assets.	This measure is a complement to operating profit, as it shows the cash surplus from operations.
Adjusted operating profit before depreciation, amortization and impairment of property, plant and equipment and intangible assets/EBITDA.	Calculated as operating profit before depreciation, amortization and impairment of property, plant and equipment and intangible assets excluding items affecting comparability.	This measure is a complement to operating profit, as it shows the cash surplus from operations adjusted for the impact of items affecting comparability.
Operating profit before amortization of acquisition-related intangible assets/EBITA	Calculated as operating profit after depreciation/amortization of tangible and intangible 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/amortization of tangible and intangible 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	2018	2017	2016
Operating profit before depreciation, amortization and impairment of property, plant and equipment and intangible assets/EBITDA.
Operating profit	10,759	11,905	9,008
Amortization of acquisition-related intangible assets	732	560	159
Depreciation/amortization	5,443	5,162	4,906
Items affecting comparability, depreciation/amortization	0	2	79
Impairment	19	0	0
Items affecting comparability, impairment	445	301	377
Items affecting comparability, impairment of acquisition-related intangible assets	69	85	180
EBITDA	17,467	18,015	14,709
Items affecting comparability excluding depreciation/amortization and impairment	930	554	2,189
Adjusted operating profit before depreciation, amortization and impairment of property, plant and equipment and intangible assets/EBITDA.	18,397	18,569	16,898

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SEKm	2018	2017	2016
Adjusted operating profit before amortization of acquisition-related intangible assets/EBITA
Operating profit	10,759	11,905	9,008
Amortization of acquisition-related intangible assets	732	560	159
Items affecting comparability, amortization of acquisition-related intangible assets	69	85	180
Operating profit before amortization of acquisition-related intangible assets/EBITA	11,560	12,550	9,347
EBITA margin	9.8%	11.5%	9.2%
Items affecting comparability, cost of goods sold	1,437	509	532
Items affecting comparability, sales, general and administration	–62	346	2,113
Adjusted operating profit before amortization of acquisition-related intangible assets/EBITA	12,935	13,405	11,992
Adjusted EBITA margin	10.9%	12.3%	11.8%

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. The latter item includes items not covered by acquisitions, restructuring and impairment but which are relevant when comparing earnings for one period with those of another. The item “Other specific events” is specified in Note B3 Operating expenses.	Separate reporting of items affecting comparability between periods provides a better understanding of the company’s underlying operating activities.
Restructuring costs	Costs for impairment together with headcount reductions 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	2018	2017	2016
ADJUSTED OPERATING PROFIT
Operating profit	10,759	11,905	9,008
Items affecting comparability	1,444	940	2,825
Adjusted operating profit	12,203	12,845	11,833
Adjusted operating margin	10.3%	11.8%	11.7%

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 operating 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.

Non-IFRS performance measure	Description	Reason for use of the measure
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	2018	2017	2016
ADJUSTED TAX
Tax	–1,050	–1,938	–3,931
Tax relating to items affecting comparability	–440	–253	–424
Adjusted tax	–1,490	–2,191	–4,355

Adjusted profit for the period	Profit for the period after deducting items affecting comparability.	Shows the period’s total underlying earnings capacity excluding items affecting comparability.
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. The measure is a good complement to enable comparison of earnings per share with other companies, regardless of whether business activities are based on acquisitions or organic growth.

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	2018	2017	2016
OPERATING CASH FLOW
Personal Care
Operating cash surplus	7,821	7,238	5,314
Change in working capital	–410	–237	289
Current capital expenditures	–1,328	–1,282	–805
Restructuring costs, etc.	–271	–266	–75
Operating cash flow	5,812	5,453	4,723

Consumer Tissue
Operating cash surplus	5,612	6,163	6,455
Change in working capital	94	–425	891
Current capital expenditures	–1,770	–1,749	–1,892
Restructuring costs, etc.	–245	–139	–255
Operating cash flow	3,691	3,850	5,199

Professional Hygiene
Operating cash surplus	5,630	5,649	5,515
Change in working capital	–565	73	–30
Current capital expenditures	–1,022	–719	–1,267
Restructuring costs, etc.	–365	–592	–83
Operating cash flow	3,678	4,411	4,135

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 the 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