CROCI
Encyclopedia
Cash return on cash invested (or cash return on capital invested) is an advanced valuation multiple. This ratio compares a post-tax, pre-interest operating cash flow
to gross cash invested by all security-holders and is a useful measure of a company’s ability to generate cash returns on its investments.
The ratio is similar to ROE
ratio, but CROCI is calculated on a cash basis and on an EV
-basis, taking into account all the company's security-holders.
Where:
Operating cash flow
In financial accounting, operating cash flow , cash flow provided by operations or cash flow from operating activities , refers to the amount of cash a company generates from the revenues it brings in, excluding costs associated with long-term investment on capital items or investment in securities...
to gross cash invested by all security-holders and is a useful measure of a company’s ability to generate cash returns on its investments.
The ratio is similar to ROE
Return on equity
Return on equity measures the rate of return on the ownership interest of the common stock owners. It measures a firm's efficiency at generating profits from every unit of shareholders' equity . ROE shows how well a company uses investment funds to generate earnings growth...
ratio, but CROCI is calculated on a cash basis and on an EV
Enterprise value
Enterprise value , Total enterprise value , or Firm value is an economic measure reflecting the market value of a whole business. It is a sum of claims of all the security-holders: debtholders, preferred shareholders, minority shareholders, common equity holders, and others...
-basis, taking into account all the company's security-holders.
Formulae
CROCI = DACF/GCIWhere:
- DACF (Debt-adjusted cash flow) = EBITDAEBITDAEBITDA is an acronym for earnings before interest, taxes, depreciation, and amortization. It is a non-GAAP metric that is measured exactly as stated. All interest, tax, depreciation and amortization entries in the income statement are reversed out from the bottom-line net income...
*(1–tax rate) + other investment gain after tax - GCI (Gross cash invested) = Gross tangible and intangible assets before depreciation or write-offs + investments in associatesAssociate companyAn associate company in accounting and business valuation is a company in which another company owns a significant portion of voting shares, usually 20–50%. In this case, an owner does not consolidate the associate's financial statements. Ownership of over 50% creates a subsidiary, with its...
+ working capitalWorking capitalWorking capital is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is...
Uses
- The (CROCI – WACCWeighted average cost of capitalThe weighted average cost of capital is the rate that a company is expected to pay on average to all its security holders to finance its assets....
) spread is a key measure of shareholder value creation and competitive advantage. If the spread is positive, a company creates value and destructs it otherwise. - The CROCI/WACC ratio is basically the same metric signaling value creation or destruction. If the ratio is higher than 1, a company creates value, and it destructs value if the reading is below 1.