Classification of accounting ratios
The ratios can be classified as:
(i) Balance Sheet Ratio
Balance sheet ratio deals with the relationship between two balance sheet items both may be of liability side or may be of assets side. These ratios are always calculated either in proportion or time and never in percentage.
Current ratio = Current Assets / Current liabilities
or ratio of fixed assets to current assets
Fixed assets / Current assets
(ii) Profitability ratios
These ratios are always calculated in percentage and always on sales such as:
Goods Profit Ratio = (Goods Profit x 100) / Net Sales
Expense Ratio (Wages) = (Wages x 100) / Net Sales
Both the items of relationship must be from profit and loss account.
(iii) Mixed Ratio
These ratios are associated with one item of profit and loss item and the other from balance sheet thus these can be calculated in percentage or times.
Formula to calculate Mixed Ratio
Stock turn over ratio = Total sales / Debtors