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
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
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.