What is the Cash-on-Cash (CoC) return? The CoC return focuses on the annual cash flow, at a moment in time or average over the investment period, as a percentage of the total equity invested in a deal.
Why is it so important? The cash-on-cash return provides investors with an estimate on how much money they earned (or could earn) on an annual basis in relation to the amount of cash they contributed to the deal.
Cash-on-Cash Calculation
Net cash flow after debt service (before taxes) divided by the total equity invested in the deal
Excel Example
Below is a simplified example of how the cash-on-cash return is calculated in excel.
Calculation applied:
Total: $1.2M/$17.5M = 7.04%
Year 1: $225K/$3.5M = 6.43%
Year 2: $241K/$3.5M = 6.88%
Year 3: $248K/$3.5M = 7.08%
Year 4: $255K/$3.5M = 7.30%
Year 5: $263K/$3.5M = 7.52%
In this example, an investor would expect to receive a 7% CoC return throughout the hold period. Another way of thinking about this is the investor's CoC return is equal to an annual dividend of 7%.
Drawback of The Cash-on-Cash Return
Similar to the equity multiple, the CoC return does not account for timing. This means, two deals with the same cash flows will return the same cash-on-cash return, no matter if one is a 5-year hold and the other is a 10-year hold.
Example:
Equity Multiple Quick Points
Formula: Net cash flow after debt service (before taxes) divided by the total equity invested in the deal
Focuses on the annual cash flow, at a moment in time or average over the investment period, as a percentage of the total equity invested in a deal
Another way of thinking about this is to consider the CoC return to be the annual dividend expected on a deal
Does not account for timing
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