Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Cash Flow Return on Investment

What it is:

The cash flow return on investment (CFROI) measures a company's cash return on invested assets. It is determined by dividing a company's gross cash flow by its gross investment.

How it works (Example):

A company invests in capital with the intention of expanding its business and increasing profitability. Cash flow return on investment measures a company's cash flow during a period of time in relation to the total value of the investments it has made.

 To illustrate, suppose a fictional company ABC Corp has invested in a total of $100 in assets. Between 1 January 2008 and 30 June 2008, the company had a positive gross cash flow of $1000. The CFROI would be calculated in the following manner:

For analytical purposes, companies will designate a benchmark rate that will help determine whether or not its CFROI is satisfactory.

Why it Matters:

Cash flow return on investment measures dollar-for-dollar a company's cash flow from invested capital. Therefore, all things being equal, it is also indicates the value of a company's capital investments in terms of how effectively those investments produce and generate profit relative to the costs they incur.