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Cash-Flow Return on Investment (CFROI)

Cash-Flow Return on Investment (CFROI) is a financial metric used to assess the return generated by a company relative to its invested capital, based on its operating cash flow. It helps investors and analysts evaluate a company’s ability to generate cash from its operations compared to the amount of capital invested. CFROI provides a measure of how efficiently a company is using its resources to generate cash, and it is often compared to a company’s cost of capital to determine whether it is creating or destroying value.

Example

If a company generates $500,000 in cash flow and has $2 million in invested capital, its CFROI would be 25%, meaning it is generating a 25% return on its invested capital through cash flow.

Key points

• CFROI measures the return on invested capital based on operating cash flow.

• It evaluates a company’s efficiency in generating cash relative to its capital base.

• A CFROI higher than the cost of capital indicates value creation; lower indicates value destruction.

Quick Answers to Curious Questions

CFROI focuses on cash flow as the measure of return, while traditional ROI may be based on accounting profits.

It helps investors assess whether a company is efficiently generating cash returns from its invested capital, which can indicate long-term sustainability and profitability.

A high CFROI suggests that the company is effectively using its capital to generate cash flow, potentially creating value for shareholders.