Definition for : Cash flow return on investment, CFROI
Cash flow Return on investment (CFROI) in its simplified version compares EBITDA with Gross capital employed: CFROI = EBITDA/ Capital employed. This ratio is used particularly in business sectors in which Charges to Depreciation do not necessarily reflect the normal deterioration of Fixed assets, e.g. in the hotel business. Cash flow Return on investment is one of the accounting indicators of Value creation. The original version of CFROI corresponds to the average of the internal rates of return on the company's existing Investments. It measures IRR earned by a firm's existing projects in order to compare it with WACC and thus estimate the Value creation. This version is one of the Economic indicators of value creation. It requires a lot of adjustments and is thus much less popular than the simplified version.
(See Chapter 28 investment criteria of the Vernimmen)
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