CLASSIFICATION OF RATIO ANALYSIS

"Ratios" can be grouped into various classes according to "financial" activity or function to be evaluated. In view of the requirements of the various users of "ratios", we can classify then into the following categories.

Liquidity "Ratios"
Profitability "Ratios"
Solvency "Ratios"

"Financial" statement "analysis" is a judgemental process. One of the primary objectives is identification of major changes in trends and relationships and the investigation of the reasons underlying those changes, The judgement process can be improved by experience and the use of analytical tools. Probably the most widely used "financial" "analysis: technique is "ratio" "analysis" the "analysis" of relationships between two or more line items on the "financial" statement. "Financial" "ratios" are usually expressed in percentage or times. Generally, "financial" "ratios" are calculated for the purpose of evaluating aspects of company's operations and fall into the following categories:

Liquidity ratios: measure a firm's ability to meet its current obligations.
Profitability ratios: measure management's ability to control expenses and to earn a return on the resources committed to the business.
Leverage ratios: measure the degree of protection of suppliers of long-term funds and can also aid in judging a firm's ability to raise additional debt and its capacity to pay its liabilities on time.
efficiency, activity or turnover ratios: provide information about management's ability to control expenses and to earn a return on the resources committed to the business.

A "ratio" can be computed from any pair of numbers. Given the large quantity of variables included in "financial" statements, a very long list of meaningful ratios can be derived. A standard list of "ratios" or standard computation of them does not exist, The following ratio presentation includes "ratios" that are most often used when evaluating the credit worthiness of customer. "Ratio" "analysis" becomes a very personal or company driven procedure. Analysts are drawn to and use the ones they are comfortable with and understand.