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Cash Return on Invested Capital – CROIC Calculator

Written by:
PK

Below is a Cash Return on Invested Capital or CROIC calculator. Enter a business's Free Cash Flow (or rarely, EBITDA) and Invested Capital, and the tool will calculate its CROIC.

Cash Return on Invested Capital Calculator

What is CROIC or Cash Return on Invested Capital?

CROIC is a capital efficiency ratio that measures how well a company employs its Invested Capital by figuring out how much cash it throws off. Canonically, it's the percentage return of Free Cash Flow divided by Invested Capital.

CROCI, or Cash Return on Capital Invested, is a similar ratio based on a measure similar to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) instead of Free Cash Flow with various adjustments for economic factors. It was invented by Deutsche Bank and is now housed with Deutsche Asset & Wealth Management (DWM).

Cash Return on Invested Capital Formula

The formula for Cash Return on Invested Capital (CROIC) is

Where:

  • Free Cash Flow – cash the company generates net of capital expenditures
  • Invested Capital – the debt and equity needed to finance the business

Both Free Cash Flow and Invested Capital aren't numbers you can pull from company statements. So let's take a look at both.

Free Cash Flow

Free Cash Flow reflects the actual cash flow generated by the business over the reporting period. Unlike the accounting fictions depreciation, free cash flow measures how much money is going out the door or staying in house by expensing things in the current period 'at cost'.

Free Cash Flow is controversial in that there are many arguments about the "correct" number. Here's one take on free cash flow to the firm:

EBIT=Earnings\ before\ Interest\ and\ Taxes\\
Change\ in\ Working\ Capital=Working\ Capital_{t}-Working\ Capital_{t-1}\\~\\
Free\ Cash\ Flow\ (to\ Firm)=EBIT*(1-tax\ rate) + Depreciation + Amortization \\
- Change\ in\ Working\ Capital - Capital\ Expenditures

Feel free to substitute your own, though!

Invested Capital

As we discussed in the Return on Invested Capital calculator, there are a few ways to calculate Invested Capital. I like to combine shareholder equity and total debt and net out cash (and near-cash) on the balance sheet:

total\ debt=short\ term\ debt +long\ term\ debt\\~\\
non-operating\ assets=cash+cash\ equivalents+investments+\\inactive\ assets\\~\\
invested\ capital=total\ debt+shareholder's\ equity -\\non-operating\ assets

However, some investors and analysts take a different approach. They may, for example, make no adjustment for cash under the argument "everything on the balance sheet needs to be productive." Fair enough – you should use the formulation most comfortable to you.

As with many measures, when you do a CROIC calculation, take the Invested Capital average between the beginning and ending period in question. As earnings are by definition changing the balance sheet (either as retained earnings, or perhaps paid out in dividends or used to repurchase shares), some adjustment for changing conditions is necessary.

Using the Cash Return on Invested Capital (CROIC) Calculator

Although both Free Cash Flow and Invested Capital are mildly controversial with no "true, agreed" calculation, they both get at an important concept: you can't "fake" either calculation (without committing fraud!)

While a company can play to the numbers for other measures like ROIC, it's hard to fake cash generation. In that way, CROIC and its closely related cousins like CROCI are superior to a naive ROIC calculation.

Other resources:

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