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

    Financial Analysis: Solvency Vs. Liquidity Ratios

    Solvency and liquidity are equally important for a company's financial health. A number of financial ratios are used to measure a company’s liquidity and solvency, and an investor should use ...
  2. 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.
  3. 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 ...
  4. Investing

    Analyze Investments Quickly With Ratios

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

    Financial Ratios to Spot Companies Headed for Bankruptcy

    Obtain information about specific financial ratios investors should monitor to get early warnings about companies potentially headed for bankruptcy.
  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.
  8. Investing

    Using The Current Ratio

    Find out more on how this liquidity ratio is used to measure a company's ability to pay short-term obligations.
  9. Investing

    5 Basic Financial Ratios And What They Reveal

    Understanding financial ratios can help investors pick strong stocks and build wealth. Here are five to know.
  10. Investing

    Key Financial Ratios to Analyze Tech Companies

    Understand the technology industry and the companies that operate in it. Learn about the key financial ratios used to analyze tech companies.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center