Certified Financial Management Specialist Practice Exam

What does a strong assessment of investment quality generally reflect?

1. High leverage ratios

2. Stable cash flow performance

3. Decreasing revenue streams

4. Increased accounts receivable

The correct answer is: Stable cash flow performance

A strong assessment of investment quality typically reflects stable cash flow performance. This stability in cash flow indicates that the investment is less risky, as it can reliably generate income that can meet obligations and support growth. Investors prioritize cash flow because it is a critical factor in determining the sustainability and viability of an investment over time. Consistent cash flows often signal a well-managed company with predictable earnings, making it an attractive option for both growth and income-oriented investors. In contrast, other options like high leverage ratios, decreasing revenue streams, and increased accounts receivable do not contribute positively to an assessment of investment quality. High leverage ratios can indicate a higher risk level due to increased debt obligations, which can strain cash flows. Decreasing revenue streams suggest declining business performance and potential future instability. Increased accounts receivable can signify that a company is having trouble collecting payments, which may lead to cash flow problems. Hence, stable cash flow performance stands out as the primary factor indicative of strong investment quality.