Cash Flow Return on Investment, usually the abbreviation CFROI is used. It is a term that refers to the operational performance of the enterprise, that the enterprise would achieve in case, that it would generate operating cash flow in the same volume, which it reached in the reference period without additional investments over the life of current assets. The performance is then compared with the average cost of capital (WACC), i.e. with the performance that is required by the investors.
CFROI is one of the comprehensive measures of the enterprise performance. Its calculation is based on the concept of Internal Rate of Return (IRR).
CFROI = GOCF / Capital Employed,
- GOCF = gross operating cash flow; it is cash flow before Interest and Taxes
- Capital Employed = Operating Assets - Interest Free Capital
For evaluation of the indicator it is necessary to calculate the Net CFROI, which arises from subtracting WACC from CFROI.
Net CFROI = CFROI - WACC,
- CFROI = Cash Flow Return on Investment
- WACC = Weighted Average Cost of Capital
If the value of Net CFROI is positive (i.e. CFROI > WACC) then it increased the value for shareholders. Conversely, if the value of the Net CFORI is negative (i,e, CFROI < WACC).
Use of the CFROI in practice: In the enterprise it used by CFO in the financial analysis to analyze ratios. This indicator is very different for companies in different sectors and it is necessary to consider it in context with the turnover.