Types Of Ratios

The conceptual foundations of financial analysis are examined in many accounting textbooks. Financial ratios provide the basis for answering some very important questions concerning the financial well-being of the firm. Financial ratios can be classified in many ways; the only limitation appears to be the inequity of the analyst. One possibility is to classify ratios according to source. For example, we would have: balance sheet ratios, income statement ratios, mixed ratios - ratios in which one item is drawn from the balance sheet, and the other from the income statement.

Much more useful is classification in accordance with various aspects of the firm's operations: liquidity, efficiency, debt and profitability (see Table Summary of Financial Ratio Analysis). In an attempt to explain each category of ratios from the perspective of an analyst who is examining the investment potential of Jimco, Inc., the financial ratios from each category will be determined from 1993 financial statements of Jimco, Inc.

Jimco's balance sheet and income statement were presented in Table 5-1 and 5-3 respectively.

This section is based on J. William Petty, Arthur J. Keown, David F. Scott, John D. Martin, David W. McPeack, Basis Financial Management, Canadian Edition, Prentice Hall Canada Inc., 1994, pp. 510-520.


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