Cash Return on Capital Invested (CROCI)

Definition

Cash return on capital invested (CROCI) is metric that compares the cash generated by a company to its equity. It is also sometimes known as “cash return on cash invested”. It compares the cash earned with the money invested.

This is a cash flow based measure as opposed to earnings based metric. Cash flow based metrics are more important for the investors because it is ultimately the cash that matters to the investors. Besides, cash flow based measures are superior to earnings based measures because the earnings can be manipulated with the help of accounting policies.

A positive point about the cash return on capital employed is that it removes the effect of non-cash expenses such as depreciation and amortization. These non-cash items are of less significance to the investors because they are ultimately interested in the cash flows.

This metric was developed by the Deutsche Bank Group and it is based on an economic profit model. Although there are no standards but the higher this measure is the better it is. A company with a higher cash return on capital invested is a good investment opportunity.

Calculation (formula)

Cash return on capital invested is calculated by dividing the earnings before interest, taxes, depreciation and amortization by the total capital invested.

Cash Return on Capital Invested = EBITDA / Capital Invested

The capital invested is defined as the equity capital and preferred shares. Long term loans are also included in the capital employed. Sometimes it is also referred to as “capital employed”. It can be calculated from the balance sheet by adding equity and long-term loans. Another method of calculating capital invested is by subtracting the current liabilities from the total assets.

Norms and Limits

Investors should not base their decision on only this measure. It should be used with other financial ratios of performance measurement to better assess the performance of a company. It should be compared with the historical data and data from other companies to see whether the performance of a company is improving or deteriorating over time.