Classification of ratios

Classification of ratios

Ratios may be classified in the following two ways:

i.            Traditional classification

ii.            Functional classification

1. Traditional classification

Traditional classification of ratios is done on the basis of the financial statements from which the ratios are calculated. Under the traditional classification, the ratios are classified as: (i) Balance sheet ratios, (ii) Income statement ratios and (iii) Inter-statement ratios.

Figure 9.1 shows some of the examples of ratios as per traditional classification:

(i) Balance sheet ratio

If both items in a ratio are from balance sheet, it is classified as balance sheet ratio.

(ii) Income statement ratio

If the two items in a ratio are from income statement, it is classified as income statement ratio.

(iii) Inter-statement ratio

If a ratio is computed with one item from income statement and another item from balance sheet, it is called inter-statement ratio.

2. Functional classification

Functional classification of ratios is based on the purpose for which ratios are computed and it is the most commonly used classification. Under the functional classification, the ratios are classified as follows:

(i) Liquidity ratios

(ii) Long term solvency ratios

(iii) Turnover ratios

(iv) Profitability ratios

Figure 9.2 shows some of the examples of ratios as per functional classification: