The Cash Returned On Capital Investment (Croci) Approach to Value Investing

Financial Times reports on the “Croci” approach to value investing, as employed by Deutsche Bank. Croci stands for “cash returned on capital investment.” It is an approach that seeks to “make a systematic search for value stocks, and make valid comparisons between otherwise different companies,” by attempting to “screen out manipulations” that may affect public accounts. Instead of market value, the approach uses “enterprise value, thus including debt and operational liabilities.” Instead of official book value, it uses “net capital invested,” which requires making assumptions to impose an “economic depreciation.” Further, the approach “values intangible assets that generate cash but do not appear on the balance sheet – such as brands and patents.” It also accounts for inflation. It is a complex approach that requires assumptions and is not cheap – Deutsche employs approximately 60 analysts to carry it out. It’s record, however, appears solid: “the US version of the Croci index has gained 170 per cent in the decade since launch, compared with 101 per cent for the S&P 500.” Two notable insights the Croci provides: “much of emerging markets’ current cheapness is ‘only optical,'” whereas “healthcare and pharmaceuticals offer much better value than conventional analysis reveals.”