Certified Valuation Analyst (CVA) Practice Exam

For a company's cash flows, what indicates a significant growth trend?

1. Increases every year

2. Fluctuates widely

3. No discernible pattern

4. Declines consistently

The correct answer is: Increases every year

A significant growth trend in a company's cash flows is indicated by consistent increases every year. This reflects a positive trajectory in financial performance, suggesting that the company is successfully expanding its operations, increasing sales, and effectively managing expenses. A steady increase not only signals operational success but builds investor confidence and can enhance market valuation, which are critical elements for business growth. In contrast, fluctuating cash flows typically imply instability and may be a sign of uncertainty in the company's operational capabilities or market conditions. No discernible pattern in cash flows suggests randomness, making it difficult to predict future performance or trends. Consistent declines in cash flows indicate poor financial health, which could stem from a lack of demand, increased expenses, or ineffective business strategies. Therefore, consistent yearly increases clearly represent a growth trend, highlighting the company's potential for continued success and viability.