Choosing between ROIC and CFROI  489
the CFROI for a division or corporate group does not easily follow from the 
CFROI calculations of the underlying business units. A group’s ROIC, how-
ever, is simply the capital-weighted average of the returns on invested capital 
of the underlying businesses.
An additional feature of CFROI is that, in its precise definition, it includes 
an adjustment for the effect of inflation on returns. The gross invested capital 
is indexed for inflation over the years dating to the initial purchase of the as-
sets involved. For most economies in North America and Western Europe, this 
usually does not make a big difference. But the impact of the adjustment is 
significant when inflation is more than a couple of percentage points per year. 
In some cases, we found that this adjustment was the key source of difference 
between a company’s CFROI and ROIC. However, adjustments for inflation can 
also be made when calculating ROIC. Basically, the adjustment involves using 
current-year dollars to express depreciation and property, plant, and equipment 
(PP&E). Adjusting ROIC for inflation and using CFROI with its inflation adjust-
ment typically lead to similar results across widely different inflation rates and 
asset lifetimes, as illustrated for a range of stylized examples in Exhibit 25.3. (See 
Chapter 26 for more details about inflation’s impact on ROIC and cash flows.)
Differences between ROIC and CFROI could be sizable for specific busi-
nesses, depending on their economics, as we saw in the preceding two ex-
amples. Nevertheless, when we analyzed 1,000 U.S. companies between 2003 
EXHIBIT 25.3  Returns under Inflation: ROIC vs. CFROI
%
Return after 20 years
Inflation rate
Asset life, years
ROIC
CFROI1
Inflation-adjusted ROIC
0
5
15
14
15
2
5
17
13
12
4
5
19
13
11
6
5
22
13
10
8
5
24
12
10
10
5
26
12
10
0
10
15
13
15
2
10
19
12
11
4
10
23
12
10
6
10
27
11
10
8
10
31
11
10
10
10
35
11
10
0
20
17
12
17
2
20
21
12
15
4
20
25
12
14
6
20
30
12
13
8
20
35
11
13
10
20
39
11
13
1 CFROI includes an inflation adjustment.

490  Alternative Ways to Measure Return on Capital
and 2013, we found that, on average, these differences were not very large (see 
Exhibit 25.4). For all but one of the ten nonfinancial sectors we considered, the 
spread between the average ROIC and CFROI was three percentage points 
or less when taking both ROIC and CFROI without inflation adjustments. 
The difference between the highest- and lowest-quartile ROIC in a sector was 
typically four times larger than this spread. Thus, your decision whether to 
measure a business’s return on capital by using ROIC or CFROI is unlikely 
to make a difference in what the result tells you about the company’s relative 
performance versus that of sector peers.
Flaws of Other Cash Returns on Capital
In practice, we see managers and analysts apply other measures of return 
on capital, not just ROIC and CFROI. Sometimes the only difference is in the 
name. For example, most definitions of return on capital employed (ROCE) 
EXHIBIT 25.4  Pretax ROIC and CFROI per Sector, 2003–2013
10-year average of median ROIC and CFROI by sector,1 %
ROIC
CFROI
1st to 3rd quarter spread
20
10
5
30
25
15
0
Materials
Total
Industrials
Utilities
Telecommunication services
Energy
Consumer discretionary
Consumer staples
Information technology
Health care
1 For the 1,000 largest U.S. companies by market capitalization.