Classification of Ratios
1. Liquidity Ratios:
These ratios measure the ability of a company to meet its current obligations, and indicate the short-term financial stability of the company. The parties interested in the liquid ratio would be employees, bankers and short-term creditors.
2. Profitability Ratios:
These measure the overall effectiveness in terms of returns generated, with profits being related to sales and adequacy of such profits as to sales or investment. The profitability ratios are important to internal management, to bankers, to investors and to the owners.
3. Leverage Ratios:
These measure the extent to which the company has been financed through borrowing (debt financing whether short or long-term). Those interested would be bankers, owners and investors.
4. Activity Ratios:
These measure the extent to which the company has been financed through borrowing (debt financing whether short or long-term). Those interested would be bankers, owners and investors.
5. Solvency Ratios:
These ratios would give a picture of the company so that an early forewarning is available for remedial action in time.
6. Financial Ratios:
These enable quick spotting of over or under-capitalization of a business, so that a proper, balance is achieved between owner’s funds, borrowed funds and shareholder’s funds.
