Simply put, cash on cash return is the ratio of the profit or cash flow generated by a property and the amount of net investment made in it, multiplied by 100. The cash flow or profit generated, which is used in its calculation, does not include taxes charged on the returns. That is, the profit considered is before taxes. Thus it is the percentage of cash that is recovered from your initial investment in a property.
This calculated ratio is mostly considered only a year after the purchase of a property. It is only an estimate of the fresh profit generated a year after property purchase. It is not an accurate estimate for later years as it doesn't take the time factor into consideration. A cash on cash return vs IRR (internal rate of return) comparison would reveal that the two concepts are quite different.
Most importantly, this ratio doesn't consider the appreciation in price of property that may happen with time. Even though a property might be generating meager cash flow, its inherent worth might have increased with time. A cash on cash return percentage does not take this fact into consideration. It is not the ultimate indicator of the profitability of any property investment. It can only provide you with an idea about the profit you are making through rental properties from any other business related to it.
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