Functional classification of ratios are as under :

1. Profitability Ratio: The earning capacity of a business unit is known as profitability. Following are the different ratios to measure profitability.

• Gross profit ratio
• Operating ratio
• Operating profit ratio
• Net profit ratio.

2. Liquidity Ratio: Liquidity means the ability of business unit to pay short-term liabilities or current liabilities. Following ratios are included in liquidity ratio :

• Current ratio
• Liquidity ratio.

(3) Solvency Ratio: The capacity of a business unit to pay the long-term liabilities is known as financial or economic solvency. Following ratio are included insolvency ratio :

• Debt to equity ratio
• Total assets to debt ratio
• Proprietary ratio
• Interest coverage ratio.

(4) Efficiency (Activity) Ratios: The profitability of the business increases, when all resources and equipment acquired by the business entity are used efficiently. Following ratios are included in efficiency ratio 

• Stock turnover
• Working capital turnover
• Debtor turnover
• Creditors turnover.