Cash Return on Capital Invested (CROCI)

What Is Cash Return on Capital Invested (CROCI)?

Cash return on capital invested (CROCI) is a formula for valuation that compares a company's cash return to its equity. Developed by the Deutsche Bank's global valuation group, CROCI gives analysts a cash flow-based metric for evaluating a company's earnings.

CROCI is also referred to as "cash return on cash invested."

Understanding CROCI

In essence, CROCI measures the cash profits of a company as a proportion of the funding required to generate them. It takes into account common and preferred share equity as well as long-term funded debt as sources of capital.

The formula for CROCI Is:

CROCI = EBITDA Total Equity Value where: 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 ValueEBITDAwhere:EBITDA=Earnings before interest, taxes,depreciation, and amortization

What Does CROCI Tell You?

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

CROCI may be used as a gauge of the effectiveness and efficiency of a company’s management, as it makes clear the results of the capital investment strategy being employed.

The results of this formula can be used in a variety of ways. A higher ratio of cash returned is naturally desirable in any report. However, putting the formula to work over several financial periods can form a clearer picture.

An Example

For instance, a company might have CROCI that shows it is well-managed at the moment, but following the gauge over several periods may indicate either growth or decline. A company can 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 shortcomings of a strategy, especially if tracked over time.

For example, companies regularly invest in the creation of new products, marketing campaigns, or development strategies. The results of those investments can be revealed by the CROCI formula because it narrows attention to cash flow. That is a number that can't be obscured.

For instance, If a retailer has put capital toward opening new store locations, but sales revenue does not increase in proportion, the CROCI formula will reveal the shortcomings of the strategy. Another retailer might achieve a stronger CROCI by adopting a different approach that either yields 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 at allocating the capital under its control to generate profitable investments. Calculating return on invested capital assesses the value of total capital, which is the sum of a company's debt and equity. 

By contrast, CROCI is concerned only with cash flows relative to equity.