Cash Return On Capital Invested is used by investors to assess the ability of an enterprise to generate return on investments.
Alternative names of Cash Return On Capital Invested:
- Cash Return On Capital Invested
- Available income on invested capital
What Does Cash Return On Capital Invested Show?
Cash Return On Capital Invested allows to assess the company’s ability to generate return on investment. In essence, it determines cash income as a part of the financial resources required for its creation. Ordinary and preferred capital as well as long-term bond loans are used as a source of capital.
Formula of Cash Return On Capital Invested
Indicator was developed by the economists from Deutsche Bank. Economic profit and invested capital form the basis of the indicator.
CROCI = EBITDA / Invested Capital
Quite often, the formula is adjusted for the amount of debt:
CROCI = Debt Adjusted EBITDA / Invested Capital
Normative Value of Cash Return On Capital Invested
CROCI has no normative value, but it is better for the company to maintain its value high enough. If the indicator is considered from the investor’s point of view, the investment decisions should be made in favor of the companies generating higher CROCI indices. It is also advisable to compare this indicator to the weighted average cost of capital (WACC). The absolute difference between these indicators makes it possible to form the competitive advantages of the enterprise. If the difference is positive, the company can create additional value. Comparison of these indicators is relative, i.e. calculated by the operation of dividing. If the CROCI / WACC value exceeds 1, the company can create an additional value. If it is below 1, the added value is not created.