RO CI ▁is ▁calculated ▁on ▁a ▁c ash ▁basis ▁and ▁on ▁an ▁E V - bas is , ▁taking ▁into ▁account ▁assets ▁fund ed ▁by ▁all ▁the ▁company ' s ▁security - hold ers . ▁ ▁Formula ▁C RO CI ▁is ▁calculated ▁as ▁the ▁internal ▁rate ▁of ▁return ▁in ▁a ▁particular ▁year ▁of ▁a ▁company ' s ▁gross ▁post - tax ▁c ash ▁flows ▁after ▁invest ing ▁the ▁gross ▁capital ▁inv ested ▁over ▁the ▁total ▁asset ▁life ▁of ▁the ▁firm . ▁In ▁principle , ▁this ▁should ▁be ▁equivalent ▁to ▁the ▁ratio ▁of ▁the ▁free ▁c ash ▁flow ▁of ▁that ▁year ▁to ▁the ▁net ▁capital ▁inv ested , ▁provided ▁dep reci ation ▁is ▁calculated ▁econom ically ▁and ▁the ▁only ▁c ape x ▁is ▁for ▁maintenance ▁. ▁ ▁Us es ▁ ▁The ▁( C RO CI ▁– ▁W AC C ) ▁spread ▁is ▁a ▁key ▁measure ▁of ▁share holder ▁value ▁creation ▁and ▁compet itive ▁advantage . ▁If ▁the ▁spread ▁is ▁positive , ▁a ▁company ▁creates ▁value ▁and ▁dest ro ys ▁it ▁otherwise . ▁ ▁The ▁C RO CI / W AC C ▁ratio ▁is ▁basically ▁the ▁same ▁metric ▁signal ing ▁value ▁creation ▁or ▁destruction . ▁If ▁the ▁ratio ▁is ▁higher ▁than ▁ 1 , ▁a ▁company ▁creates ▁value , ▁and ▁it ▁dest ro ys ▁value ▁if ▁the ▁ratio ▁is ▁below ▁ 1 . ▁ ▁C RO CI ▁can ▁be ▁compared ▁to ▁a ▁company ' s ▁economic ▁price ▁to ▁book ▁( bro ad ly ▁equivalent ▁to ▁a ▁company ' s ▁Tob in ' s ▁Q )