Chartered Financial Analyst (CFA) Practice Exam Level 2

What financial metric would be most relevant for assessing a company's ability to cover its obligations?

1. Adjusted FFO

2. PEG Ratio

3. Trailing PE

4. Leading PE

The correct answer is: Adjusted FFO

The chosen answer of Adjusted FFO (Funds from Operations) is particularly relevant for assessing a company's ability to cover its obligations because it provides a clear view of the cash flow generated by a company's operations, especially in real estate investment trusts (REITs) and other income-producing assets. Adjusted FFO adjusts the standard FFO by excluding certain non-recurring items and providing a more accurate reflection of operational performance, thereby offering insight into the cash available for financing costs, dividend payments, and other obligations. Due to its focus on cash generated from core operations, Adjusted FFO helps stakeholders evaluate liquidity and a company's ability to meet short-term obligations and service its debt. This makes it a vital metric for creditors and investors concerned about financial stability and cash flow sufficiency. In contrast, the other metrics listed focus more on stock valuation rather than cash flow and liquidity. The PEG Ratio, for example, incorporates growth rates in its assessment but does not address immediate cash obligations. Trailing and Leading PE ratios (Price-to-Earnings) provide insights into a company's valuation relative to its earnings, but they do not account for cash flows and consequently do not give a complete picture of a company's ability to support its obligations. Thus, while useful for investment