Classification of RATIOS

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Ratios can be classified on the basis of exposition into four broad groups.
1. Liquidity Ratio

2. Leverage Ratio

3. Profitability Ratio


4. Activity Ratio

1. Liquidity Ratio

The impotence of adequate liquidity in the sense of the ability of the firm to meet current or short term obligations when they become due for payment can hardly be over stressed. The short term creditors of the firm are interested in the short term solvency or liquidity of a firm.

The liquidity ratios measures the ability of the firm to meet it’s short term obligation and reflect the short term financial strength or solvency of a firm. These ratios are also termed as working capital or short term solvency ratio. An enterprises must have adequate working capital to run its day to day operation.

The ratios are of much help to short term creditors like trade creditors bankers and other short term lenders as it indicates the capacity of the concern to pay off its short term obligations they also help employees share holders and management.
 
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