Cash Flow Return on Investment

Cash flow return on investment ( CFROI ) is a backward-looking, one-period financial return code. There are two ways, especially the younger CFROI II of practical importance. The CFROI is the basis of cash value added.

Development

The CFROI was developed by HOLT Planning Associates, which was later adopted by the Boston Consulting Group ( BCG).

Calculation

CFROI I

The CFROI I is based on the internal rate of return.

  • The gross cash flow (GCF ) is intended to reflect the profitability of the company, but less financial strength. The calculation is performed by a Retrograde assessment, ie the cash flow is derived from the figures in the balance sheet, when the true cash flows are generally not available. The adjustment of the gain is based on the scheme of the German Association for Financial Analysis and Asset Management / Schmalenbachgesellschaft (DVFA / SG).
  • The gross investment base ( BIB) has invested up to a date in a business capital, ie no interest-bearing debt is not part of the size. The BIB is made up of planned depreciable assets and not amortized depreciable assets together. For non-depreciable assets, the carrying values ​​are used as a base. The non- interest-bearing debt falls out of the BIB. The calculation is based on the assessment data created thereby understandably difficult, since a breakdown does not occur. Therefore, it is assumed for simplicity that trade payables, advances from customers and tax liabilities are non-interest bearing.
  • Property and equipment are stated at historical acquisition and production costs. This is determined by the accumulated depreciation are added to the carrying amounts of balance sheet. To achieve comparability of assets acquired at different times, an inflation adjustment.
  • The useful life is the period in which an asset generates cash flows. In general, for reasons of economy, formed groups of assets, which have the same useful life.

CFROI II

Due to poor comprehensibility of the CFROI on the rate of return for the users BCG developed the CFROI II This is calculated by

  • BCF - Gross cash flow
  • ÖA - Economic depreciation
  • BIB - gross investment base
  • The gross investment base (BIB ) is determined in principle as in version I, with the difference that pension provisions are now always considered to be interest bearing. In addition, expenses must with investment character such as Hire, leasing or R & D are activated.
  • The gross cash flow (GCF ) is also adequate for Version I of the CFROI, but here, the pension provisions to be calculated in the cash flow.
  • The economic depreciation ( ÖA ) is the amount that is necessary to make future replacement investments. The amount is, ceteris paribus, less than the trading or tax depreciation, since the amount is always added. Calculation of ÖA done by: WACC - Weighted Average Cost of Capital

The height of the CFROI II is always higher than the CFROI I, when the cost of capital (WACC) below the CFROI is. This happens because in variant II, the depreciation is applied to the cost of capital, while the amounts are applied to the CFROI I in variant I.

Criticism

For strongly fluctuating borrowing requirements within a period can be a misrepresentation of the interest expense. This can be solved by averaging debt. By using the historical acquisition prices for assets ensures that companies are still comparable with different system structure. Furthermore, the CFROI is largely free from political influences balance, but by the retrograde determination of course he is not totally free from it. A disadvantage is the past orientation of the code. Furthermore, the useful life of the fixed assets has a high impact on the CFROI, whereby the same may be the target of manipulation easy. The period relatedness of CFROI brings with it the risk that a short-term orientation of the company is carried out.

Financial capital#Borrowed capital Book value Critical accounting policy
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