Cash Flow Return on Investment (CFROI) CFROI measures how well a company's investments generate cash flow over a period of time. It is calculated by comparin...
CFROI measures how well a company's investments generate cash flow over a period of time. It is calculated by comparing the company's cash inflows and outflows during a specific period and then dividing the result by the total cost of capital employed.
Formula:
CFROI = Cash inflows/Total cost of capital
Key aspects of CFROI:
Positive CFROI: Indicates that the company is generating more cash than it is investing, meaning it is generating a positive return.
Negative CFROI: Indicates that the company is investing more money than it is generating in cash, resulting in a negative return.
Zero CFROI: Indicates that the company is equally investing and generating cash, implying a neutral financial position.
Importance of CFROI:
CFROI is a valuable metric for evaluating a company's financial health and its ability to generate returns on its investments.
It helps investors compare different companies with varying capital structures and growth prospects.
It can be used to assess a company's potential profitability and financial stability.
CFROI should be considered alongside other financial metrics such as return on equity (ROE) and net income to provide a comprehensive understanding of a company's financial health.
Examples:
A company with a cash flow of 150,000 would have a CFROI of 0.67, indicating that it is generating 67% of the cost of capital.
A company with a negative cash flow and a total cost of capital of $100,000 would have a CFROI of -100%, indicating a substantial loss of funds.
A company with a CFROI of 100% might be considered financially healthy and generating strong returns for its investors