Cash flow return on investment

The Cash Flow Return on Investment ( CFROI ) is a past-oriented, single-period financial return indicator. There are two types, the younger CFROI II being of practical importance. The CFROI is the basis of cash value added .

development

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

calculation

CFROI I

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

The gross cash flow (BCF) is supposed to show the profitability of the company, but less so the financial strength . The calculation is based on a retrograde evaluation , i.e. H. the cash flow is derived from the figures in the balance sheet , since the true cash flows are generally not available. The adjustment of the profit is done according to the scheme of the German Association for Financial Analysis and Asset Management / Schmalenbachgesellschaft (DVFA / SG).

The gross investment base (BIB) is the capital invested in a company up to a key date, i.e. H. Non-interest-bearing debt is not part of the size. The BIB consists of scheduled depreciable assets and non-scheduled depreciable assets. The book values are used as the basis for non-depreciable assets .

The non-interest-bearing borrowed capital falls out of the BIB. The calculation based on the balance sheet data is understandably difficult because there is no breakdown. For the sake of simplicity, it is assumed that liabilities to suppliers, down payments from customers and tax liabilities are non-interest-bearing.

Tangible assets are valued at their historical acquisition and manufacturing costs . It is determined by adding the accumulated depreciation to the book values of the balance sheet. In order to be able to compare the assets acquired at different times, an inflation adjustment is made .

The useful life is the time in which an asset generates cash flows. In general, for reasons of economy, groups of assets are formed that have the same useful life.

CFROI II

Due to the fact that the CFROI based on the interest rate method was difficult to understand for users, BCG developed the CFROI II . This is calculated through

${\ displaystyle CFROI = {\ frac {BCF - {\ ddot {O}} A} {BIB}}}$

BCF - gross cash flow
ÖA - economic depreciation
BIB - gross investment base

The gross investment base (BIB) is basically determined as in version I, with the difference that pension provisions are now always regarded as interest-free. Furthermore, expenses with an investment character such as B. rent, leasing or R&D can be capitalized.

The gross cash flow (BCF) is also adequate for version I of the CFROI, but here the pension provisions are included in the cash flow.

The economic depreciation (ÖA) is the amount necessary to make future replacement investments. The amount is, ceteris paribus , smaller than the commercial or tax depreciation, since the amount is also subject to interest.

The OA is calculated by:
${\ displaystyle {\ ddot {O}} A = {\ frac {WACC} {(1 + WACC) ^ {n} -1}} \ cdot {\ text {Depreciable Assets}}}$ ${\ displaystyle {\ ddot {O}} A = {\ frac {WACC} {(1 + WACC) ^ {n} -1}} \ cdot {\ text {Depreciable Assets}}}$
- WACC - Weighted Average Cost of Capital

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

criticism

In the case of strongly fluctuating outside capital requirements within a period, the interest expense can be misrepresented. This can be solved by averaging the debt capital. By using the historical acquisition prices for capital goods, it is achieved that companies with different investment structures can still be compared. Furthermore, the CFROI is largely free of accounting policy influences, but due to the retrograde determination it is of course not completely free of them. The past orientation of the key figure is disadvantageous. Furthermore, the useful life of property, plant and equipment has a high impact on the CFROI, which can easily be the target of manipulation. The period-related nature of the CFROI entails the risk that companies will be short-term oriented.

literature

Steffen Lehmann: New ways in the valuation of listed stock corporations. Deutscher Universitätsverlag, Wiesbaden 1994, ISBN 3-8244-6028-9 .
Thomas Lewis, Steffen Lehmann: Considerate investment decisions. In: Business research and practice. 1992, p. 44. Vol, pp. 1-13.
Thomas Lewis: Increasing the company value: total value management. Verlag Moderne Industrie, Landsberg / Lech 1995, ISBN 3-478-34662-2 .