Classification Of Ratios

Classification Of Ratios

Ratios can be classified into different categories depending upon the basis of classification.

The traditional classification has been on the basis of the financial statement to which the determinants of a ratio belong. On this basis of ratios could be classified as:

1. Profit and loss Accounts Ratios, i.e. ratios calculated on the basis of the items of the Profit and Loss account only e.g. Gross Profit ratio, stock turnover ratio, etc.
2. Balance sheet ratios, i.e., ratio calculated on the basis of figures of Balance sheet only, e.g., current ratio, debt-equity etc.
3. Composite ratios or inter-statements ratios, i.e., ratio on figures of profit and loss account as well as the balance sheet, e.g. fixed assets turnover ratio, overall profitability ratio etc.

However, the above basis of classification has been found to be guide and unsuitable because analysis of Balance sheet and Balance sheet and income statement can not be done in insalaion. The have to be studied together in order to determine the profitability and solvency of the business. In order that ratios serve as a toll for financial analysis, they are now classified as:

(1) Profitability Ratios, (2) Coverage Ratios, (3) Turn-over Ratios, (4) Financial ratios, (a) Liquidity Ratios (b) Stability Ratios.