Cash Flow Return on Investment
What it is:
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:
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.