Certified Valuation Analyst (CVA) Practice Exam

What two financial measures must an analyst consider to define the benefit stream potential of a company?

1. Sales revenue and net income

2. Earnings or cash flow

3. Equity and liabilities

4. Assets and liabilities

The correct answer is: Earnings or cash flow

When assessing the benefit stream potential of a company, earnings or cash flow are the two key financial measures that analysts prioritize. Earnings provide insight into the profitability of a company over a specific period, reflecting how much money the company generates after expenses are deducted. This figure is vital because it demonstrates the company's ability to generate profit from its operations, which ultimately contributes to shareholder value. Cash flow analysis is equally essential, as it focuses on the actual liquidity position of the business. This measure indicates how much cash is available to fund operations, pay debts, reinvest in the business, and return to shareholders. A positive cash flow reveals that the company can sustain its operations and invest in growth opportunities, which is critical for long-term viability. Considering both earnings and cash flow enables analysts to obtain a comprehensive view of a company's financial health and its potential to generate future benefits for investors. This aligns closely with investment valuation, as both measures illustrate different aspects of a company's performance, ensuring a well-rounded assessment of its benefit stream potential.