What is Cash ROIC Ratio?
CROIC is a method of valuation of cash return and the equity of the company. CROIC provides cash flow based metric to the analysts for the evaluation of the company’s earnings. It is also known as “Cash Return on Cash Invested”. CROIC is developed by the global valuation group of the Deutsche Bank’s.
Explanation of Cash ROIC Ratio
CROIC is a variation of the economic profit model. Furthermore, it measures the company’s cash profits with the funding proportion required to generate them. Preferred and common stock, both are considered as a source of capital. This model is similar to ROIC, but it focuses on the cash instead of profits. If the CROIC is higher, it means that company is generating more cash and it also shows that business is moving toward profits. It also compares the cash earned by the money invested.
CROIC is a metric based on the measure of cash flow rather than earnings. This metric is important for the investors because cash ultimately matters to the investors. The advantage of CROIC is that it eliminates the effect of non cash expenses such as amortization and depreciation. These items are not very much significant to the investors because the investors are ultimately interested in the cash flows.