Cash Return on Capital Invested (CROCI)

CROCI, or Cash Return on Capital Invested, compares the cash generated by a company to its equity. This metric is cash flow based as opposed to earnings based. 

CROCI - Cash Return on Capital Invested

CROCI, or Cash Return on Capital Invested, compares the cash generated by a company to its equity. This metric is cash flow 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.


Calculation of Cash Return on Capital 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 formula: CROCI = EBITDA / Capital Invested

Interpretation of Cash Return on Capital Invested

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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