Lenders' evaluation: Current Assets to Current Liabilities, Quick Assets that is current assets minus inventories to Current Liabilities, Long term Debt to Net Assets, total Debt to Net Worth, Long-term Debt to Net Assets, Long-term Debt to Net Worth, total Debt to total Assets and Net Profit before Interest and Taxes that is also called as NBIT to Interest.
Fundamental classification Ratios under this classification are grouped according to a basic function relevant to financial analysis. Four such functional groups have been usually recognized.
a) Liquidity Ratios are ratios that measure a firm's capability to meet its maturing short-term obligations. The main common ratio indicating the extent of liquidity or lack of it is current ratio and rapid ratio.
b) Leverage Ratios are ratios that measure the extent to that a firm has been financed through debt. Suppliers of debt capital would look to equity as margin of safety, although owners would borrow to keep control with restricted investment. And if they are capable to earn on' borrowed funds more than the interest which has to be paid, the return to owners is magnified. Illustration includes debt to times interest earned, total assets and charge coverage ratios.
c) Activity Ratios are ratios that measure the effectiveness along with that a firm is using its resources. Illustration includes are: Inventory turnover, fixed assets turnover, Average collection period and total assets turnover.
d) Profitable Ratios are ratios which measure managements overall effectiveness as demonstrated through the returns generated on investment and sales. Illustrations could be profit as net or gross margin. ROI or Net Profit to total assets, Net profit after taxes to net worth one additional class of ratios is occasionally added to the four groups given above. It is termed as the Market Value group of ratios that relate investor's expectations regarding the company's future to its present performance and financial conditions.
Illustrations would cover PE that is Price-earnings and Market or book-value ratios. The basic classification is probably the most extensively utilized mode of presenting financial statement analysis.