Cash return, also known as cash on cash return, is a financial metric used to evaluate the profitability and efficiency of an investment. It measures the cash flow generated by an investment relative to the initial amount of cash invested. Cash return is typically expressed as a percentage and helps investors assess the income generated from their investment on a cash basis.
The formula for calculating cash return is:
Cash Return = (Cash Flow / Initial Cash Investment) * 100
Where:
Cash Flow represents the cash generated by the investment, such as rental income, dividends, or proceeds from the sale of an asset.
Initial Cash Investment refers to the initial amount of cash invested in the project or asset.
Cash return provides a clear measure of the income generated by the investment relative to the cash invested, without taking into account non-cash items or accounting measures such as depreciation or amortization. It focuses solely on the cash flow aspect, which is particularly relevant for investors seeking income-generating investments or evaluating the liquidity and cash-generating potential of an investment.
The interpretation of cash return depends on the context of the investment. A higher cash return indicates a higher cash flow relative to the initial investment, which is generally considered more favorable. However, it is essential to consider other factors such as the investment’s risk profile, the time horizon, and the industry norms to make a comprehensive assessment.
Cash return is commonly used in real estate investments, where rental income is the primary cash flow source. It helps real estate investors evaluate the income potential of a property and compare it to other investment opportunities. Cash return is also applicable to other types of investments, such as stocks, bonds, or business ventures, where the focus is on generating cash flow.
It’s important to note that cash return alone does not capture the complete picture of an investment’s performance. Other metrics, such as total return (including capital gains or losses), risk-adjusted return, and investment-specific factors, should be considered alongside cash return to make informed investment decisions.