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Cash return on capital invested compares cash earnings with the operating capital supporting them. Define the numerator and denominator, calculate returns for two business units, and reconcile the result to working capital movements.
Cash return on capital invested compares cash earnings with the operating capital used to generate them. Using the convention below, annual cash earnings of $3,300,000 on average gross operating capital of $17,500,000 produce an 18.86% return. The definition matters because a cash earnings ratio does not show cash left after inventory growth or asset purchases.
Cash return on capital invested = Cash earnings / Average gross operating invested capital
Cash earnings = Operating profit × (1 − Operating tax rate) + Depreciation and amortization
Gross operating invested capital = Gross operating fixed assets + Noncash operating working capital
Average capital = (Opening capital + Closing capital) / 2
This is a simple cash earnings convention for management reporting. It uses an average capital base to match a full year's earnings. Aswath Damodaran's paper on return measures, pages 14–18, explains the cash earnings approach, the reason for pairing depreciation addbacks with gross fixed assets, and its limitations.
The numerator is before changes in working capital and capital spending. It is also before financing costs. The tax adjustment assumes an operating tax charge without an interest deduction; it is not the company's cash tax payment automatically copied from a bank export.
This is distinct from proprietary CROCI approaches and from inflation-adjusted CFROI calculations. Those can use asset lives, replacement values, and valuation assumptions absent from this simple ratio. Label the reported measure with its actual formula rather than treating the names as interchangeable.
For the accounting earnings measure without the depreciation addback, use return on invested capital.
Bring the operating profit schedule, the cash-flow reconciliation showing depreciation, and opening and closing balance-sheet schedules. Keep an entity, period, currency, account code, and amount on every supporting row. Use the same entity boundaries across all files, including the treatment of shared corporate assets.
The SEC's financial statement guide distinguishes the balance sheet's point-in-time balances from income and cash-flow statements covering a period. It also explains that the indirect cash-flow reconciliation adjusts earnings for noncash items and changes in operating assets and liabilities. That distinction is why a depreciation addback alone is not cash collected.
Map the balance-sheet rows before dividing. Here, noncash operating working capital means operating receivables plus inventory and other included operating current assets, less non-interest-bearing operating current liabilities. Exclude surplus cash and financing debt. The detailed account construction belongs in the invested capital guide; apply one approved definition throughout this comparison.
A US industrial supplier compares two units for the fiscal year ended September 30, 2026. Both use an assumed operating tax rate of 25%. Neither has goodwill, amortization, or other operating assets outside the displayed capital schedule. All money below is USD; returns are rounded to two decimal places after calculation.
| Cash earnings step | Equipment unit (USD) | Parts unit (USD) | Total (USD) |
|---|---|---|---|
| Operating profit | 2,000,000 | 1,200,000 | 3,200,000 |
| Operating tax: profit × 25% | 500,000 | 300,000 | 800,000 |
| After-tax operating profit | 1,500,000 | 900,000 | 2,400,000 |
| Add depreciation | 600,000 | 300,000 | 900,000 |
| Cash earnings | 2,100,000 | 1,200,000 | 3,300,000 |
The capital schedule retains gross fixed asset cost rather than subtracting accumulated depreciation.
| Capital step | Equipment unit (USD) | Parts unit (USD) | Total (USD) |
|---|---|---|---|
| Opening gross fixed assets | 8,000,000 | 5,000,000 | 13,000,000 |
| Opening noncash working capital | 2,000,000 | 1,000,000 | 3,000,000 |
| Opening gross operating capital | 10,000,000 | 6,000,000 | 16,000,000 |
| Closing gross fixed assets | 9,500,000 | 5,800,000 | 15,300,000 |
| Closing noncash working capital | 2,500,000 | 1,200,000 | 3,700,000 |
| Closing gross operating capital | 12,000,000 | 7,000,000 | 19,000,000 |
| Average capital | 11,000,000 | 6,500,000 | 17,500,000 |
| Cash earnings / average capital | 19.09% | 18.46% | 18.86% |
Equipment produces 2,100,000 / 11,000,000 = 19.09%. Parts produces 1,200,000 / 6,500,000 = 18.46%. The company figure divides summed cash earnings by summed average capital: 3,300,000 / 17,500,000 = 18.86%.
Multiply the company's unrounded return by average capital. The result must be $3,300,000, exactly matching the numerator. Also verify that opening and closing unit capital totals equal the consolidated operating capital schedule after eliminating intercompany balances. Do not average the two unit percentages without capital weights.
Working capital then explains why cash earnings exceed the cash generated before capital spending in this simplified example.
| Cash conversion step | Equipment unit (USD) | Parts unit (USD) | Total (USD) |
|---|---|---|---|
| Cash earnings | 2,100,000 | 1,200,000 | 3,300,000 |
| Less increase in noncash working capital | 500,000 | 200,000 | 700,000 |
| Cash before interest and capital spending | 1,600,000 | 1,000,000 | 2,600,000 |
This bridge assumes the stated operating tax charge was paid and there were no other noncash adjustments or operating cash movements. In a real export, add each omitted reconciling item separately. Equipment's working capital increase is 2,500,000 − 2,000,000 = $500,000; the same subtraction supports every row in the bridge.
The ratio helps finance compare asset productivity, but the bridge determines whether better returns turned into cash. For the return earned on additional capital rather than the full base, use return on incremental invested capital.
Upload your operating profit, depreciation, and capital schedules as a file or Google Sheet; Covirage maps the columns, and its tools compute and check the figures. The external AI model explains the result with every figure traced to its rows. Create a free Covirage account and bring a sample of your own data.
See Covirage for finance teams for the supporting finance reporting context.
Treat it as a defined management measure. Reports can use different cash numerators, capital bases, and timing conventions. Label those choices beside the percentage and preserve the calculation bridge so another finance team can reproduce the result before comparing business units.
Adding depreciation back to profit while retaining a heavily depreciated capital base can flatter older assets. Gross fixed assets restore accumulated depreciation to that part of the denominator. The resulting measure still needs care because historical asset costs do not reflect current replacement prices.
No. The cash earnings convention here is before working capital movements and capital expenditures. Customer balances, inventory purchases, asset replacement, debt payments, and other cash requirements can absorb that amount. Reconcile the ratio to actual cash movements before making a funding decision.