Certified Valuation Analyst (CVA) Practice Exam

Which analysis can identify company performance and trends?

1. Cash flow analysis

2. Ratio analysis

3. Value chain analysis

4. Cost-benefit analysis

The correct answer is: Ratio analysis

Ratio analysis is focused on assessing various aspects of a company's performance through the use of specific calculations that relate different financial metrics to one another. This type of analysis allows for the evaluation of a company's efficiency, profitability, liquidity, and solvency over time. By comparing calculated ratios—such as return on equity, current ratio, or debt-to-equity ratio—over different periods or against industry benchmarks, analysts can identify trends in a company's performance. This makes ratio analysis an essential tool for stakeholders who want to gain insights into the financial health and operational effectiveness of a business over time. Other methods, while valuable in their own contexts, do not specifically focus on identifying trends as effectively as ratio analysis. For example, cash flow analysis primarily looks at the inflows and outflows of cash to assess liquidity and cash management, without necessarily highlighting broader performance trends. Value chain analysis examines the different activities within a business to understand how they contribute to value creation but does not focus on performance metrics in a comparative manner. Cost-benefit analysis evaluates the financial implications of decisions but is not geared specifically towards tracking performance trends over time. Therefore, ratio analysis stands out as the most effective choice for identifying company performance and trends.