SharpFokus Short Cashflow Course – Lesson 5
📌 CFROA (Cash Flow Return on Assets) as a Key Measure
⸻
🔹 What is CFROA?
Cash Flow Return on Assets (CFROA) measures how effectively a company generates cash relative to its assets.
Most people focus on profit margins, but cashflow is what matters. A business can show high profits but struggle to generate real cash—CFROA helps reveal the truth.
💡 Key Insight: A company’s assets should be generating strong cash returns. If not, those assets may not be worth the investment.
⸻
🔎 How to Calculate CFROA
📌 Formula:
🔹 CFROA = Free Cashflow / Total Assets
This tells us:
✔ How much cash the company generates from what it owns.
✔ Whether assets are being used effectively to generate cash.
📌 Example:
• A company with IDR 10 trillion in assets and IDR 500 billion in free cashflow has a CFROA of 5%.
• If the CFROA is lower than the risk-free interest rate, the company may not be using its assets effectively.
⸻
🔹 Why CFROA Matters
📌 How a Business Owner Thinks:
A company owner can either:
1️⃣ Keep money in the bank, earning risk-free interest.
2️⃣ Invest in business assets, expecting a higher return than the bank.
🚨 If CFROA is lower than interest rates, it may be better to hold cash rather than invest in the company!
⸻
📌 Summary
🔹 CFROA shows how well a company converts assets into cash.
🔹 If CFROA is too low, the business may not be worth the investment.
🔹 Smart business owners compare CFROA to interest rates to decide where to allocate capital.
📌 Next Lesson:
In Lesson 6, we introduce Market Value Equivalent, a way to compare a company’s CFROA with how the market values it.
👉 Go to Lesson 6
📌 CFROA (Cash Flow Return on Assets) as a Key Measure
⸻
🔹 What is CFROA?
Cash Flow Return on Assets (CFROA) measures how effectively a company generates cash relative to its assets.
Most people focus on profit margins, but cashflow is what matters. A business can show high profits but struggle to generate real cash—CFROA helps reveal the truth.
💡 Key Insight: A company’s assets should be generating strong cash returns. If not, those assets may not be worth the investment.
⸻
🔎 How to Calculate CFROA
📌 Formula:
🔹 CFROA = Free Cashflow / Total Assets
This tells us:
✔ How much cash the company generates from what it owns.
✔ Whether assets are being used effectively to generate cash.
📌 Example:
• A company with IDR 10 trillion in assets and IDR 500 billion in free cashflow has a CFROA of 5%.
• If the CFROA is lower than the risk-free interest rate, the company may not be using its assets effectively.
⸻
🔹 Why CFROA Matters
📌 How a Business Owner Thinks:
A company owner can either:
1️⃣ Keep money in the bank, earning risk-free interest.
2️⃣ Invest in business assets, expecting a higher return than the bank.
🚨 If CFROA is lower than interest rates, it may be better to hold cash rather than invest in the company!
⸻
📌 Summary
🔹 CFROA shows how well a company converts assets into cash.
🔹 If CFROA is too low, the business may not be worth the investment.
🔹 Smart business owners compare CFROA to interest rates to decide where to allocate capital.
📌 Next Lesson:
In Lesson 6, we introduce Market Value Equivalent, a way to compare a company’s CFROA with how the market values it.
👉 Go to Lesson 6