﻿

# Cash on cash return

In investing, the cash-on-cash return is the ratio of annual before-tax cash flow to the total amount of cash invested, expressed as a percentage. :$mbox\left\{cash-on-cash return\right\} = frac\left\{mbox\left\{annual before-tax cash flow\left\{mbox\left\{total cash invested$

It is often used to evaluate the cash flow from income-producing assets. Generally considered a quick napkin test to determine if the asset qualifies for further review and analysis. Cash on Cash analyses are generally used by investors looking for properties where cash flow is king, however, some use it to determine if a property is underpriced, indicating instant equity in a property.

Example

Suppose an investor purchases a \$1,200,000 apartment complex with a \$300,000 down payment. Each month, the cash flow from rentals, less expenses, is \$5,000. Over the course of a year, the before-tax income would be \$5,000 &times; 12 = \$60,000, so the cash-on-cash return would be: $frac\left\{ mbox\left\{60,000\left\{ mbox\left\{300,000=0.20=20%$.

Limitations

*Because the calculation is based solely on before-tax cash flow relative to the amount of cash invested, it cannot take into account an individual investor's tax situation, the particulars of which may influence the desirability of the investment. However the investor can usually deduct enough Capital Cost Allowance to defer the taxes for a long time.
*The formula does not take into account any appreciation or depreciation. When some cash is a return of capital (ROC) it will falsely indicate a higher return, because ROC is not income.
*It does not account for other risks associated with the underlying property.
*It is essentially a simple interest calculation, and ignores the effect of compounding interest. The implication for investors is that an investment with a lower nominal rate of compound interest may be superior, in the long run, to an investment with a higher cash-on-cash return.

It is possible to perform an after-tax Cash on Cash calculation, but accurate depictions of your adjusted taxable income are needed to correctly address how much tax payment is being saved through depreciation and other losses.

*Return of capital

Wikimedia Foundation. 2010.

### Look at other dictionaries:

• Cash-On-Cash Return — A rate of return often used in real estate transactions. The calculation determines the cash income on the cash invested. Calculated as: For example when you purchase a rental property, you might put down only 10% for a cash down payment. Cash on …   Investment dictionary

• cash-on-cash return — A method used to find the return on investments when there is no active secondary market. The yield is determined by dividing the annual cash income by the total investment. Bloomberg Financial Dictionary See: current yield or yield to maturity.… …   Financial and business terms

• Cash Return On Capital Invested - CROCI — A method of valuation that compares a company s cash return to its equity. Developed by the Deutsche Bank s global valuation group, CROCI provides analysts with a cash flow based metric for evaluating the earnings of a company. Also known as cash …   Investment dictionary

• Cash Return On Assets Ratio — A ratio used to compare a businesses performance among other industry members. The ratio can be used internally by the company s analysts, or by potential and current investors. The ratio does not however include any future commitments regarding… …   Investment dictionary

• Cash Return on Gross Investment - CROGI — A measure of financial performance calculated as gross cash flow after taxes divided by gross investment. CROGI is used by some companies as an indicator for rate of return. Another way to calculate this measure is EBITDA less taxes and then… …   Investment dictionary

• Return on capital — Return on invested capital (ROIC) is a financial measure that quantifies how well a company generates cash flow relative to the capital it has invested in its business. It is defined as Net operating profit less adjusted taxes divided by Invested …   Wikipedia

• Return of capital — (ROC) refers to payments back to capital owners (shareholders, partners, unitholders) that exceed the growth (net income/taxable income) of a business. It should not be confused with return on capital which measures a rate of return . The ROC… …   Wikipedia

• Return to the Promised Land — Saltar a navegación, búsqueda Return to the Promised Land banda sonora de Johnny Cash Publicación Original: 1992 Reedición: 21 de noviembre de 2000 …   Wikipedia Español

• Cash flow return on investment — is a valuation model that assumes the stock market sets prices based on cash flow, not on corporate performance and earnings.CFROI = Cash Flow / Market RecapitalizationFor the corporation, it is essentially internal rate of return (IRR). CFROI is …   Wikipedia

• Cash Explosion — later known as Cash Explosion Double Play , is an official Ohio Lottery TV game show, which originated in Cleveland and was broadcasted on television stations throughout Ohio. The show is now taped by Mills James Productions in Columbus, Ohio. I …   Wikipedia