Cash Return on Equity allows to assess the effectiveness of the equity formation by means of money generated from the operating activity.
Alternative names of Cash Return on Equity:
- Coefficient of Return On Equity
- Cash Return on Equity
What Does Cash Return on Equity Show?
Cash Return on Equity is often used in financial analysis along with the traditional profitability indicators to specify the calculations of accounting profitability by cash inflows. At the same time, the indicators can be investigated both in comparison with the operating and net cash flow.
Formula of Cash Return on Equity
CROE = Operating cash flow / Equity (average value)
Various options are available for estimating this coefficient. For example, it can be compared to non-equity capital, like stock or statutory one or consider preferred shares. In this case the denominator should change appropriately.
Normative Value of Cash Return on Equity
There is no normative value for Cash Return on Equity. The indicator is studied in its dynamics or in comparison with the average industry value. The financial policy should focus on increasing the value of the indicator, thus improving the efficiency of using equity capital.