Candidates are expected to be able to compute the basic types of financial ratios and interpret them, so as to be able to gain a better understanding of a company's financial position. Current financial accounting pronouncements, the nuances of generally accepted accounting principles, as well as exercises requiring candidates to make adjustments to financial statements are not considered for the purpose of the CFP® exam.


  1. Liquidity Ratios - measure the ability of a company to meet its current financial commitments.
    1. Working Capital: the amount of liquid assets available to pay for near-term obligations. Not a ratio, its formula reads thus:

Working Capital = current assets-current liabilities.

    1. Current Ratio: compares current assets to current obligations and is calculated as follows:

Current Ratio = Current assets/current liabilities

    1. Acid-test (quick) ratio - a more extreme measure of a company's short-term liquidity, it measures 'quick' assets (current assets-inventory (less liquid)) as a percentage of current liabilities:

Quick Ratio = Quick assets (current assets-inventory)/current liabilities.

    1. Cash Assets Ratio - more stringent a measure, still, of a company's near-term liquidity, this ratio is calculated as follows:

Cash Assets Ratio = Cash and Equivalents/Current Liabilities.

    1. Debt Service Ratio:

Debt Service Ratio = EBIT (Earnings Before Interest and Taxes)/Annual interest and principal payments

Ratio Analysis: Activity, Profitability and Debt Ratios

Related Articles
  1. Investing

    Liquidity Measurement Ratios

    Learn about the current ratio, quick ratio, cash ratio and cash conversion cycle.
  2. Investing

    Financial Analysis: Solvency vs. Liquidity Ratios

    Solvency and liquidity are equally important for a company's financial health.
  3. Investing

    Do Your Investments Have Short-Term Health?

    If a company is strong enough to survive tough times, it is more likely to provide long-term value.
  4. Investing

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  5. Investing

    Ratio Analysis

    Ratio analysis is the use of quantitative analysis of financial information in a company’s financial statements. The analysis is done by comparing line items in a company’s financial ...
  6. Investing

    Dynamic Current Ratio: What It Is And How To Use It

    Learn why this ratio may be a good alternative to the current, cash and quick ratios.
  7. Investing

    What is the Cash Ratio?

    The cash ratio is the ratio of a company's total cash and cash equivalents to its current liabilities.
Frequently Asked Questions
  1. What are Some Advantages of Raising Capital Through Private Placement?

    Understand how a business can raise capital through private placement and the benefits business owners receive through this ...
  2. A Hostile Takeover vs. Friendly Takeover

    Learn about the difference between a hostile takeover and a friendly takeover, and understand how proxy fights and tender ...
  3. What Level of Return on Equity is Common for Bank?

    Discover what the average return on equity (ROE) ratio is for companies in the banking industry, and understand the significance ...
  4. How is Warren Buffett Plan Bequeathing his Estate?

    Find out how much Warren Buffett is leaving for his heirs and how he wants the funds invested after his death. Learn about ...
Trading Center