Chartered Financial Analyst (CFA) Level 1 Practice Exam

Which financial metric assesses a company's overall cash flow health?

1. Cash flow per share

2. Dividend payout ratio

3. Return on Capital

4. EBITDA per share

The correct answer is: Cash flow per share

The metric that best assesses a company's overall cash flow health is cash flow per share. This measure gives investors insight into the amount of cash generated by a company's operations on a per-share basis. It reflects the company’s ability to generate cash which is crucial for sustaining operations, paying dividends, and funding future growth. By focusing on cash rather than earnings, it provides a clearer picture of financial health, especially since cash is more readily available for operational needs than accrual-based accounting income. While dividend payout ratio, return on capital, and EBITDA per share are also important metrics in evaluating financial performance, they do not directly measure cash flow health as effectively. The dividend payout ratio indicates how much of a company's earnings are being returned to shareholders but does not provide a complete view of cash generated from operations. Return on capital focuses on the efficiency with which a company uses its capital to generate profits but again does not specifically address cash flow. EBITDA per share provides insight into earnings before interest, taxes, depreciation, and amortization, but it does not represent actual cash flow and may include non-cash items. Therefore, cash flow per share stands out as the most appropriate metric for assessing a company's cash flow health, making it the correct choice in this context.