Cash Return On Gross Investment

What Is Cash Return On Gross Investment (CROGI)?

Cash Return On Gross Investment (CROGI) is a financial performance indicator that measures the cash flow generated by a company with its invested capital.

CROGI is calculated by dividing gross cash flow after taxes by gross investment. CROGI is important because investors want to determine how effectively a company makes use of the money it invests in itself.

KEY TAKEAWAYS

• Cash return on gross investment (CROGI) is a measure of how well a company puts its money to use to generate cash flows from investments.

• Because it uses gross figures (instead of net figures), CROGI is a rough calculation that does not account for things like transaction costs, taxes, depreciation, or inflation.

• Cash return on inflation-adjusted gross investment (CROIGI) adds in the effect of inflation to arrive at a more realistic figure, especially on longer-term projects.

Understanding Cash Return On Gross Investment (CROGI)

Cash Return On Gross Investment (CROGI) is one of the numerous measurements that can be used to assess a company's value. It is calculated as:

CROGI = gross cash flows / gross investment

where:

• Gross cash flows are cash flows before taxes

• Gross investment = net working capital + fixed assets + accumulated depreciation and amortization

Other measurements include discounted free cash flow, economic value-added, enterprise value, return on capital employed (ROCE), and return on net assets (RONA), to name a few. Each of these measurements is calculated using a subset of the numbers companies report in their financial statements, such as revenues, expenses, debt, and taxes.

A similar measurement, Cash Return on Inflation Adjusted Gross Investment (CROIGI), allows investors to add an inflation adjustment to the gross fixed assets to approximate their value in today's dollars. This gives a fair value to the asset base, regardless of age. For example, CROIGI would allow an investor to determine that a 10-year-old manufacturing plant's return may be lower than a new plant's return once the values of the investments are compared in today's dollars.

CROGI vs. ROGIC

Another similar measure is known as return in gross invested capital (ROGIC). The only difference between the two is that CROGI uses gross cash flows in the numerator while ROGIC uses net operating profit after tax (NOPAT). NOPAT is calculated as  (net operating profit before tax + depreciation and amortization) * (1 - income tax rate). They both use gross investment in the denominator.

Similar to ROGIC is return on invested capital (ROIC), but ROIC uses net (and not gross) invested capital. Invested capital is equal to a firm's total debt, capital leases, and equity plus non-operating cash expenses.

CROGI and ROGIC are both good measures in identifying firms that can steadily reward investors with investment returns. Note that CROGI and ROGIC calculations are used far less in practice than return on investment (ROI) analyses, since ROI is a metric that uses the net gains or losses generated on investment, relative to the total sum of money initially invested.

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