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Home Accounting Ratios Analysis/Financial Ratios Analysis Classification of  Ratios

Classification of Ratios:

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Neither the number of ratios is limited nor the purpose of analysis is uniform. Therefore set of ratios required will depend upon the purpose of analysis; type of data available to the analyst etc. In general, the accounting ratios may be classified on the following basis. Classification is not exclusive and may be overlapping in certain cases.

Traditional Classification of Ratios:

This is traditional method of classifying ratios. Under this category, ratios are classified into:

1. Balance Sheet or Position Statement ratios:

Balance sheet or position statement ratios are those ratios which are derived from two variables appearing in the balance sheet. For example, current ratio, debt equity ratio etc.

2. Profit and Loss Account or Income Statement Ratios:

Sometimes also known as operating ratios are derived from the variables appearing in the manufacturing, trading and profit and loss account. For example, inventory turnover ratio, gross profit ratio, expense ratio etc.

3. Inter Statement Ratios:

Inter statement ratios also known as combined or mixed ratios are such ratios which establish relationship between variables picked up from both the statements i.e. balance sheet and final account. For example debtors turnover, assets turnover, return on capital etc.

Functional Classification or Classification According to Test Specified:

Under this classification, ratios may be grouped in accordance with the type of test they are supposed to perform. Thus, ratios may be grouped as:

1. Liquidity Ratios:

Liquidity ratios are the ratios meant for testing short-term financial position of a business. These are designed to test the ability of the business to meet its short-term obligation promptly. For example, current ratio, quick ratio fall under this group.

2. Solvency Ratios: 

Solvency ratios are also known as leverage ratios. These are meant for testing long term financial soundness of any unit. Primarily these establish and study relationship between owned funds and loaned funds. For example, debt-equity ratio, capital gearing ratio etc., are covered under this group.

3. Efficiency Ratios:

Efficiency ratios are also known as activity ratios. These are meant to study the efficiency with which the resources of the unit have been used. These are also popularly known as turnover ratios. Examples are; inventory turnover ratio, return on investment etc.

More study material from this to

More study material from this topic:

Meanings, Nature and Usefulness of Ratios Analysis
Interpretation of Ratios
Important Factors for Understanding Ratios Analysis
Significance and Usefulness Ratios Analysis
Classification of Ratios
Analysis of Short Term Financial Position or Test of Liquidity
Current Ratio
Quick/Acid Test/Liquid Ratio
Absolute Liquid Ratio
Inventory/Stock Turnover Ratio
Debtors / Receivable Turnover Ratio
Creditors / Payables Turnover Ratio
Working Capital Turnover Ratio
Profitability Ratios
Gross Profit Ratio (GP Ratio)
Operating Profit Ratio
Net profit ratio (NP ratio)
Earnings Per Share Ratio
Operating ratio
Expense ratio
Solvency ratios - Test of Long Term Solvency
Debt-equity Ratio
Debt Service Ratio or Interest Coverage Ratio
Fixed Assets Ratio
Debts to Total Funds or Solvency Ratio
Reserves to Capital Ratio
Capital Gearing Ratio
Proprietary Ratio
Accounting Ratios Formulas
Limitations of Ratios Analysis




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