Business, Legal & Accounting Glossary
A measure of investment returns before taking into account the effect of capital structure. The cash return on capital invested is computed as the ratio of cash profits in proportion to the funding necessary to generate them and is found by the formula: earnings before interest, taxes, depreciation, and amortization / invested capital. The invested capital is further defined as the total assets less excess cash not necessary for operations.
CROCI, or Cash Return on Capital Invested, compares the cash generated by a company to its equity. This metric is cashflow based as opposed to earnings-based. Cash flow is generally considered more important than earnings as earnings can be manipulated via accounting policies. Cash Return on Capital Invested is also known as Cash Return on Cash Invested.
Cash Return on Capital Invested is calculated by dividing the earnings before interest, taxes, depreciation and amortization by the total capital invested.
The capital invested is defined as the equity capital and preferred shares. Long term loans are also included in the capital employed.
Cash Return on Capital Invested was developed by the Deutsche Bank Group and it is based on an economic profit model. There are no specific rules regarding its usage 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.
Investors should not base their decision solely on this parameter. Cash Return on Capital Invested should be used with other financial ratios 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.
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This glossary post was last updated: 21st November, 2021 | 0 Views.