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CFA Level I · CFA Level I Exam · Analyzing Statements of Cash Flows II

Common-size cash flow analysis shows that a mature company's capital expenditure has fallen from 14% to 6% of revenue over three years, while operating cash flow stayed near 16% of revenue. This pattern most likely indicates that the company:

The company is most likely reducing reinvestment. With operating cash flow steady at about 16% of revenue and capex falling from 14% to 6%, free cash flow rises, but lower investment may limit future growth. Expansion would show higher capex, and operating cash flow shows no decline.

  1. Ais rapidly expanding its productive capacity
  2. Bis reducing reinvestment, which may lift free cash flow but limit future growthCorrect
  3. Chas lowered its operating profitability

Explanation

Lower capital expenditure with stable operating cash flow raises free cash flow to the firm in the short term, but reduced reinvestment may constrain future growth or signal underinvestment. Rapid expansion would show rising capex. Operating cash flow was stable, so profitability did not clearly decline.

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