Definition of return on invested capital (CROCI)

0


What is Cash Return on Capital Invested (CROCI)?

Return on cash on invested capital (CROCI) is a valuation formula that compares a company’s return on cash to its equity. Developed by Deutsche Bank’s global valuation group, CROCI gives analysts a cash flow-based measure to assess a company’s earnings.

CROCI is also referred to as “cash return on cash invested”.

Understanding CROCI

In essence, CROCI measures a company’s cash profits as a proportion of the funding needed to generate them. It considers common and preferred stocks as well as long-term funded debt as sources of capital.

The CROCI formula is:














CROCI


=




EBITDA




Total equity value


















or:
















EBITDA


=


Earnings before interest, taxes,
















depreciation and amortization








begin {aligned} & text {CROCI} = frac { text {EBITDA}} { text {Total Equity Value}} & textbf {where:} & text {EBITDA} = text {Earnings before interest, taxes,} & text {depreciation and amortization} end {aligned}



CROCI=Total equity valueEBITDAor:EBITDA=Earnings before interest, taxes,depreciation and amortization

What does CROCI tell you?

The valuation represented by CROCI eliminates the effects of non-cash expenses, allowing investors and analysts to focus their attention on the company’s cash flow. It can also counter subjective representations of profits which may be influenced by the particular accounting practices adopted by a company.

Key points to remember

  • The CROCI formula measures the efficiency of a business by comparing the necessary capital expenditures with the income it has generated.
  • Results are perhaps the most informative when tracked over multiple financial reporting periods.
  • The simplicity of the formula is its strength. It focuses closely on cash flow.

CROCI can be used as a measure of the effectiveness and efficiency of running a business, as it clearly indicates the results of the capital investment strategy used.

The results of this formula can be used in different ways. A higher ratio of returned money is naturally desirable in any report. However, applying the formula over several financial periods can provide a clearer picture.

An example

For example, a business may have a CROCI that shows it is well run at the moment, but tracking the gauge over multiple time periods may indicate growth or decline. A business may maintain a positive valuation as determined by this metric, but still show a steady decline that suggests a loss of efficiency or other questionable strategic choices.

The CROCI formula can reveal the strengths or weaknesses of a strategy, especially if it is followed over time.

For example, companies regularly invest in the creation of new products, marketing campaigns or development strategies. The results of these investments can be revealed by the CROCI formula because it restricts attention to cash flow. It is a number that cannot be masked.

For example, if a retailer has invested capital to open new stores, but the turnover does not increase proportionately, the CROCI formula will reveal the shortcomings of the strategy. Another retailer could achieve a stronger CROCI by taking a different approach that either generates higher sales or requires less capital investment.

The difference between CROCI and ROIC

Return on invested capital (ROIC) is another calculation used to assess a company’s efficiency in allocating capital under its control to generate profitable investments. The ROI calculation evaluates the value of total capital, which is the sum of a company’s debt and equity.

In contrast, CROCI is only interested in cash flows relating to equity.


Leave A Reply

Your email address will not be published.