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CFROI (Cash Flow Return On Investment) | Formula | Calculation - YouTube
Channel: WallStreetMojo
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today we have a topic with asset cash
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flow returns on investments it's as
simple as that I know how much cash flow
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as a part of the return that goes with
your investment that you have piston as
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a part of your money this is the example
of Starbucks corp capital employed and
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the cash from operations so the capital
employed was 18.47 billion
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cash flow from the operation goes around
11.94B there was
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a significant rise in both the scenario
and the jump has been taken but there's
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a huge jump that has been seen from 2018
itself so what exactly this all ratio is
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all about we are trying to understand
first what is the CFROI okay the CFROI
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or cash flow or it is also known as your
IRR of the company as it is compared
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with the hurdle rate it is compared with
the hurdle rate to the understand
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whether the profit or the investment is
doing well or not like it was designed
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by hold value associates you know the
measure all all allows the investor to
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go into the internal structure of the
company to find out how cash is created
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in the organization it helps you to
understand know how company finances its
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operations and how financial providers
are being paid more ever you know the
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cash flow returns on investments also
takes inflation into account so CFROI
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is a valuation model
it's a valuation model and at the same
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time it does not take into account the
performance of the earnings of the
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company right so we'll try and
understand the formula for this
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particular concept the CFROI is equal
to the OCF divided by the capital
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employed
so to be able to calculate the CFROI we
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need to understand both the OCF and CE
right so let's understand them one by
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one first is OCF that is operating cash
flow in simple terms the operating cash
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flow is the amount of the cash that
comes in after paying operating expenses
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for the company so well we will first
look at the net income and do following
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adjustments according to the indirect
method of cash flow OCF is equal to
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your net income plus your non-cash
expenses plus changes in walking cap
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again now capital employed C let's look
at the capital employed or part rate it
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is okay I will again say it it is net
income OCF operating cash flow is your
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net income plus non-cash expenditure
plus changes in working capital and CFROI
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formula is operating cash flow divided
by the capital employed now we'll discuss
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see the CEO of the company used to
method two usual means of measures to
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calculate the capital employed there are
the two ways to find out the capital
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employed no matter which we use we need
to remain consistent in to approach the
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capital employed is equal to your fixed
assets plus your working capital right
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and second your capital employed is
equal to your total assets less your
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current liabilities right the second
method is easier and and in the example
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section we'll use the second method to
ascertain the capital employed back on
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the Starbucks example the chart that we
saw over here you know the operating
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cash flow standing at 11.94B and the capital employed
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standing at 18.47B so the CFROI will be is equal to
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the CFROI is going to be is equal to
11.94 divided by
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18.47 that's going
to be 64.67%
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65
okay so we have got the percentage but
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how to interpret so that is our next
topic of disparate discussion that is
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the interpretation part interpret the CFROI cannot be interpreted
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without comparing it to the hurdle rate
so usually the hurdle rate is the
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weighted average
weighted
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average cost of capital the WACC okay
now once the CFROI is calculated it is
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compared with the CFROI is compared
with the WACC and then the net CFROI
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is calculated so here's how we can
calculate CFROI the cash flow from return
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on investment less the weighted average
cost of capital right so if the net CF
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ROI if the net CFROI is let's say
positive that as the CFROI is greater
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than the WACC then it increases the
value of the shareholders and if the net
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CFROI is let's say negative that is the
CFROI is less than the WACC
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then it decreases the value of the
shareholders now let's understand the
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example see let's say Ms.Shweta has been thinking of investing in Q company but
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before investing she wants to know
whether Q company would be able to
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appreciate our value as a as a
shareholder so she decided to find out
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the cash flow return on investment and
the net CFROI right so she has
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some of the following details something
like this details are something like
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this net income depreciation deferred
tax account receivables inventories and
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so on and so forth it goes around with a
couple of details we have in we have the
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above information available and first
will try to calculate over here the OCF
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that is the operating cash flow so we
will try and incorporate this first so
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let's try and incorporate the numbers
we'll start with OCF here we'll start
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with net income so net income over here
is 6,00,000 plus any non-cash
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expenditures
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just add over here okay non-cash
expenditure will be depreciation
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amortization deferred tax both of them
above so we'll take down all those
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numbers here okay and now we will have
to add any increase in the or the
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changes in the working capital okay
which will be increasing account racer
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will decrease in inventory accounts
payable and all of this about let's take
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down the numbers here increase in
account receivable has to be deducted
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this will be decrease in inventory has
to be added increase in account payable
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decrease in ability should be deducted
and this will be added okay now any
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increase in the accrued the profit on
the sale of property will be deducted so
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we'll take down that number here 12000
so now we'll get from this
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above cash flow from operating
activities okay so that will be just
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take down all the numbers just sum it up
everything is equal to sum all these
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numbers out here so it's 646700
so we have the component
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of the CFR we need to calculate the
another one that is capital M so for
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capital employed we need total assets that is e right then current liability that's
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B and then there will be capital
employed that is A - right let's get the
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total assets here 32 lack current
liabilities 4 lakh and capital
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employed will be 32 lakh - 4 lakh that is 28 lakh so here's the cash flow
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return on investment of Q company that
is the cash flow return on the
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investment formula CFROI is equal to
just get the numbers out here see if ROI
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6.4700 divided by
28 lakh and that gives us 23.1%
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so - no hurdle rate total rate and
to compare the cash flow rate or
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investment method we need to first
compute the WACC and find out the same
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if you calculate over here the WACC it's
long process but it comes down to
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4.06 then the net cash flow
rate on an investment is twenty
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23.10 as for CFROI and WACC so
the net cash flow or return
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on investment is going to be 23-4.6
this is percentage so it's gonna
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be 0.06 that is 19.04 so from the
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above share is now confident that Q
company will be able to appreciate the
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investment should be making as a as a
result she would go ahead and invest
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into the company so in the final
analysis CFROI is one of the best
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measure if you want to know an accurate
picture of how company is doing other
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accounting ratio work but there are
based on the flawed idea that more
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profit means you know better resources
management and better returns but in
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actual sense how much cash is coming and
how much is going out is what is
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important and will always decide how a
company is doing in terms of the
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performance in the market and every
investor should calculate the CF ROI and
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the net cash flow or returns on
investment before investing into any
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company so that's it for this particular
topic I think if you have learned and
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