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

Two firms in the same industry report the following operating cash flow and revenue. Firm X: revenue 500, CFO 60. Firm Y: revenue 900, CFO 90. Firm X also reports capital expenditure of 40 and Firm Y of 45. Based on common-size analysis using revenue as the base, which statement is most accurate?

Firm X has the higher CFO margin and the higher capital expenditure intensity. X's CFO is 12.0% of revenue against 10.0% for Y, and X's capex is 8.0% against 5.0%. Common-size percentages, not absolute amounts, make the firms comparable.

  1. AFirm Y has the higher CFO margin and the lower capital expenditure intensity
  2. BFirm X has the higher CFO margin and the higher capital expenditure intensityCorrect
  3. CFirm X has the higher CFO margin and the lower capital expenditure intensity

Explanation

Firm X CFO margin is 60/500 = 12.0% versus Firm Y 90/900 = 10.0%. Capex intensity is 40/500 = 8.0% for X versus 45/900 = 5.0% for Y. Thus X has both the higher CFO margin and higher capex intensity, even though Y has larger absolute amounts.

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