Chartered Financial Analyst (CFA) Level 1 Practice Exam

What does cash flow to revenue ratio indicate?

1. Profitability relative to total revenue

2. CFO / Net revenue

3. Net income / Total revenue

4. Gross income / Total assets

The correct answer is: CFO / Net revenue

The cash flow to revenue ratio measures a company's cash flow from operations (CFO) relative to its net revenue. This ratio provides insight into the efficiency and effectiveness of a company's operations by indicating how much cash is generated for every dollar of revenue earned. A higher ratio suggests that a company is converting a greater portion of its revenue into cash, which can be an important indicator of financial health and sustainability. In this context, focusing on cash flow rather than net income is crucial because cash flow provides a clearer picture of a company's operational efficiency, as it reflects actual cash available for purposes such as reinvestment, paying down debt, or distributing dividends. This distinction is important in evaluating a company's ability to manage its resources. The other options indicate different financial metrics that do not specifically relate to the cash flow to revenue ratio, making them unsuitable for this particular question. For instance, measuring profitability relative to total revenue or calculating net income against total revenue focuses more on profitability rather than on cash generation efficiency. These ratios can provide useful insights but do not capture the same operational dynamics as the cash flow to revenue ratio does.