CROCI

Cash return on cash invested^[1] (or cash return on capital invested)^[2] 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.

Formula

$\mbox{CROCI} = {\mbox{DACF} \over \mbox{GCI}}$ ^[3]

Where:

• DACF (Debt-adjusted cash flow) = EBITDA*(1–tax rate) + other investment gain after tax
• GCI (Gross cash invested) = Gross tangible and intangible assets before depreciation or write-offs + investments in associates + working capital^[4]

Uses

• The (CROCI – WACC) 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 destroys value if the ratio is below 1.

References

1. Underinvestment in Commodities Means MarketsWill Be Tighter, Sooner
2. Cash Return On Capital Invested - CROCI
3. China sports primer: Initiate on 3 names; Peak C-Buy, Anta C-Sell
4. Workshop V: Relative Valuation

External links

• Target called inexpensive, attractive. Goldman analyst eyes retailer's CROCI valuation
• Change is coming: A framework for climate change – a defining issue of the 21st century
• Workshop V: Relative Valuation