What does cash flow analysis specifically measure?

Cash flow analysis specifically measures a business's ability to generate more cash than it spends. This metric is crucial because it reflects the company’s operational efficiency and overall financial health. Positive cash flow indicates that a company can sustain its operations, invest in growth opportunities, pay debts, and return values to shareholders. When cash inflows exceed cash outflows, it signifies effective cash management, which is essential for the survival and expansion of the business.

While options related to operational efficiency, future profitability, and investment potential are important aspects of financial analysis, they do not directly encapsulate what cash flow analysis measures. Cash flow focuses solely on the actual movement of cash in and out of the business rather than merely assessing profits or potential growth, which could include non-cash accounting elements. Thus, the emphasis on generating more cash than is spent directly highlights the essence of cash flow analysis.