What is Cash Flow Return on Investment?
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 Does Cash Flow Return on Investment Work?
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 Does Cash Flow Return on Investment Matter?
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.