📊 Example 5: Company C vs. Company D also a natural resources company – High vs. Low CFROA
📌 Companies:
• Company C – high CFROA,
• Company D – low CFROA,
📌 Period: Last 3 Years (2022-2024)
📌 Metric: Cash Flow Return on Assets (CFROA)
⸻
🔹 How Effectively Do These Companies Generate Cash?
CFROA measures how much cash a company generates relative to its total assets.
Comparing two companies in the same industry shows how different strategies impact cashflow performance.
📊 3-Year Average CFROA:
✔ Company C: 40% – Strong cashflow generation relative to assets.
❌ Company D: 2% – Weak cash returns despite a large asset base.
📌 Key Insight: A high CFROA means a company is effectively converting its assets into cash, while a low CFROA suggests assets are not being used effectively.
⸻
🔎 Why Is Company C More Effective Than Company D?
📌 1️⃣ Asset Utilization & Effectiveness
• Company C generates strong cash returns using a smaller asset base.
• Company D has a large asset base but struggles to generate cashflow.
📌 2️⃣ Business Model Differences
• Company C has lower capital intensity and strong cash margins.
• Company D requires heavy investment currently with long payback periods.
📌 3️⃣ Impact on Shareholders
• Company C can afford high dividends because it generates strong free cashflow.
• Company D has little free cashflow left to return to shareholders.
⸻
📊 Key Takeaways
✔ Company C’s high CFROA means its assets are highly effective in generating cash returns.
✔ Company D’s low CFROA means its assets are not producing enough cash relative to their size.
✔ CFROA is a critical measure for assessing how well a company turns its assets into cashflow.
📌 This is why CFROA matters more than just looking at total profits or assets. A business with low CFROA may struggle to generate enough cash to sustain growth or pay shareholders.
⸻
👉 Go to the Next Example
👉 Go to Lesson 6
📌 Companies:
• Company C – high CFROA,
• Company D – low CFROA,
📌 Period: Last 3 Years (2022-2024)
📌 Metric: Cash Flow Return on Assets (CFROA)
⸻
🔹 How Effectively Do These Companies Generate Cash?
CFROA measures how much cash a company generates relative to its total assets.
Comparing two companies in the same industry shows how different strategies impact cashflow performance.
📊 3-Year Average CFROA:
✔ Company C: 40% – Strong cashflow generation relative to assets.
❌ Company D: 2% – Weak cash returns despite a large asset base.
📌 Key Insight: A high CFROA means a company is effectively converting its assets into cash, while a low CFROA suggests assets are not being used effectively.
⸻
🔎 Why Is Company C More Effective Than Company D?
📌 1️⃣ Asset Utilization & Effectiveness
• Company C generates strong cash returns using a smaller asset base.
• Company D has a large asset base but struggles to generate cashflow.
📌 2️⃣ Business Model Differences
• Company C has lower capital intensity and strong cash margins.
• Company D requires heavy investment currently with long payback periods.
📌 3️⃣ Impact on Shareholders
• Company C can afford high dividends because it generates strong free cashflow.
• Company D has little free cashflow left to return to shareholders.
⸻
📊 Key Takeaways
✔ Company C’s high CFROA means its assets are highly effective in generating cash returns.
✔ Company D’s low CFROA means its assets are not producing enough cash relative to their size.
✔ CFROA is a critical measure for assessing how well a company turns its assets into cashflow.
📌 This is why CFROA matters more than just looking at total profits or assets. A business with low CFROA may struggle to generate enough cash to sustain growth or pay shareholders.
⸻
👉 Go to the Next Example
👉 Go to Lesson 6