Which liquidity and repayment ratios are most commonly used in CLFP credit analysis?

• A. Current ratio, quick ratio, and debt service coverage ratio (DSCR).
• B. Net profit margin, return on assets, and gross margin.
• C. Debt-to-equity ratio, times interest earned, and cash ratio.
• D. Asset turnover, price-earnings ratio, and working capital.

Answer: (A)

This question is about how lenders assess a borrower’s ability to meet short‑term obligations and to service debt. The current ratio and quick ratio are liquidity measures that show how easily a company can cover upcoming liabilities with assets that can be converted to cash. The current ratio compares all current assets to current liabilities, giving a broad view of short-term solvency. The quick ratio tightens this by excluding inventory, since inventory isn’t as readily turned into cash, providing a tougher test of immediate liquidity.

The debt service coverage ratio (DSCR) goes beyond pure liquidity and ties cash flow to loan repayment. It compares net operating income to annual debt service (principal and interest), indicating how many times the business can cover its debt obligations from its operating performance. A DSCR above 1 means there’s enough cash flow to meet debt payments, which is a key indicator lenders look for in credit decisions.

These three are the best fit because they directly address both liquidity (how easily obligations can be met in the near term) and repayment capacity (how well the business can generate enough cash to service debt). The other options lean more toward profitability, leverage, or non-liquidity metrics, which don’t provide the same clear view of short-term solvency and debt service readiness.