CROCI Deep Dive Discussion

We follow up on last week’s deep post (here) on cash return on gross capital invested (CROCI), which we view as a complementary profitability metric to return on capital employed (ROCE). The videopod starts with the reasons to introduce a second, primary metric due to some of the issues with ROCE around write-offs and the inherent incentive to under-invest given the nature of the ROCE calculation. We discuss how CROCI offers different insights at the sub-sector level. Finally, we provide hypothetical examples based on actual company data for two companies that took large write-offs that boosted ROCE in subsequent years; one company continued to lag on CROCI while the other showed fundamental improvement. It is this kind of divergence that we find interesting, especially when ROCE is rendered less meaningful due to recent large impairment charges. As always, we welcome feedback, pushback, and discussion on this (and all!) topics we discuss.