Cash-flow return on investment (CFROI) is a valuation model that assumes the

stock market A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange a ...

sets prices based on

cash flow Cash flow, in general, refers to payments made into or out of a business, project, or financial product. It can also refer more specifically to a real or virtual movement of money. *Cash flow, in its narrow sense, is a payment (in a currency), es ...

, not on corporate performance and earnings. :

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For the corporation, it is essentially

internal rate of return Internal rate of return (IRR) is a method of calculating an investment's rate of return. The term ''internal'' refers to the fact that the calculation excludes external factors, such as the risk-free rate, inflation, the cost of capital, or fin ...

(IRR). CFROI is compared to a hurdle rate to determine if investment/product is performing adequately. The hurdle rate is the total cost of capital for the corporation calculated by a mix of cost of debt financing plus investors' expected

return on equity The return on equity (ROE) is a measure of the profitability of a business in relation to its equity; where: : Jason Fernando (2023)"Return on Equity (ROE) Calculation and What It Means" Investopedia Thus, ROE is equal to a fiscal year's net in ...

investments. The CFROI must exceed the hurdle rate to satisfy both the debt financing and the investors

expected return The expected return (or expected gain) on a financial investment is the expected value of its return (of the profit on the investment). It is a measure of the center of the distribution of the random variable that is the return. It is calculated ...

. :

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Michael J. Mauboussin in his 2006 book ''More Than You Know: Finding Financial Wisdom in Unconventional Places'', quoted an analysis by Credit Suisse First Boston, that, measured by CFROI, performance of companies tend to converge after five years in terms of their survival rates. The CFROI for a firm or a division can then be written as follows: :

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This annuity is called the economic depreciation: :

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where ''n'' is the expected life of the asset and ''K''_''c'' is the replacement cost in current dollars.

See also

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Further reading