Ratios can be further classified based on their functional aspects as discussed below.
Liquidity ratios are used to find out the short-term paying capacity of a firm, to comment short term solvency of the firm, or to meet its current liabilities. Similarly, turnover ratios are calculated to know the efficiency of liquid resources of the firm, Accounts Receivable (Debtors) Turnover Ratio and Accounts Payable (Creditors).
Debt equity ratio and interest coverage ratio are calculated to know the efficiency of a firm to pay long-term debts and to meet interest costs. Leverage ratios are calculated to know the proportion of debt and equity in the financing of a firm.
Activity ratios are also called turnover ratios. Activity ratios measure the efficiency with which the resources of a firm are employed.
The results of business operations can be calculated through profitability ratios. These ratios can also be used to know the overall performance and effectiveness of a firm. Two types of profitability ratios are calculated in relation to sales and investments.
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FUNCTIONAL CLASSIFICATION OF RATIOS |
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Liquidity Ratios |
Long-Term Solvency and Leverage Ratios |
Activity Ratios Asset Management Ratios |
Profit Abilities Ratios |
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(A) ● Current Ratio ● Liquid Ratio ● Absolute Liquid or Cash Ratios ● Interval Measure (B) ● Debtors Turnover Ratio ● Creditor Turnover Ratio ● Inventory Turnover Ratio |
● Debt/Equity Ratio ● Debt to total Capital Ratio ● Interest Coverage Ratio ● Cash Flow/ Debt ● Capital Gearing |
● Inventory Turnover Ratio ● Debtors Turnover Ratio ● Fixed Assets Turnover Ratio ● Total Assets Turnover Ratio ● Working Capital Turnover Ratio ● Payable Turnover Ratio ● Capital Employed Turnover Ratio |
(A) In relation to sales ● Gross Profit Ratio ● Operating Ratio ● Operating Ratio ● Operative Profit Ratio ● Net Profit Ratio ● Expenses Ratio (B) In relation to Investments ● Return on Investment ● Return on Capital ● Return on Equity ● Return on Total ● Resources ● Earnings per Share ● Price Earnings Ratio |