Abstract
    These ratios  were  originally  developed  as  short   term  credit 
    analytical devices, and their origin can be traced as far back as 
    the late nineteenth century. A variety of financial ratios were 
    developed by analysts in the early decades of this century; and 
    by the end of the 1920's, a great outpouring of ratio data began 
    to fl.ow from many indi vidual analysts and institutions.
    financial ratios are held to be somewhat inefficient predictors 
    of fi  nancial difficulties. The evidence bearing on this question 
    is not overly abundant, but it appears as though this general 
    low opinion of the utility of financial ratios may have to be  
    revised.
  A  Classification of Financial Ratios
     • Short-term Liquidity Ratios
      • Current assets to current debt ("cur  rent ratio")
      • Current assets less inventory to cur  rent debt ("quick ratio")
      • Cash plus marketable securities to current debt
     • Long-term Solvency Ratios
      • Net operating profit to interest ("times-interest-earned ratio")
      • Net worth to total debt
      • Net worth to long-term debt
      • Net worth to fixed assets
     • Capital Turnover Ratios
      • Sales to accounts receivable
      • Sales to inventory
      • Sales to working capital
      • Sales to fixed assets
      • Sales to net worth
      • Sales to total assets
     • Profit M argin Ratios
      • Net operating profit to sales
      • Net profit to sales
     • Return on Investment Ratios
      • Net operating profits to total assets
     • Net profits to net worth
  STATISTICAL NATURE OF
  FINANCIAL RATIOS
   The most fundamental and perhaps most important question 
   about the statis  tical nature of :financial ratios concerns the type 
   of distributions they exhibit. Surpris  ingly, formal information on 
   this  qust.ion  is  somewhat  limited.  Published  statistical  series 
   provide average financial ratios
   First,  in  regard  to  industry  classifica tion,  surprisingly  few 
   systematic analyses have been made of this important factor. 
   The evidence bearing on the  eff ects of the next two factors, 
   size of  firm and cyclical conditions, is quite abundant, al  though 
   most of it is in the form of aggre  gate data. 
     The  various  relationships  of  aggregate  :financial 
     ratios  to  size  of    firm  can  be  summarized    as 
     follows :
     • Short-term  liquidity  and  long-term,  solvency 
       ratios  are  related  to  size  of  firm  in  a  positive, 
       parabolic   manner.     In  other    words,    the 
       relationship  is  positive  for  smaller  firms  and 
       negative for larger firms.
     • Profit-margin ratios and return on in  vestment 
       ratios vary directly with size of firm.
     • The capital-turnover ratios vary in  versely with 
       size of firm; but accounts re  ceivable turnover 
       varies in a parabolic, negative manner.
     The behavior patterns of financial ratios at cyclical 
     turning points can be summarized as follows:
     •  The short-term liquidity ratios and the net worth 
       to  total  debt  ratio  vary  in versely  with  cyclical 
       fluctuations.
     • The  other  long-term  solvency  ratios,  all  the 
       capital-turnover   ratios   except   ac    counts-
       receivable turnover, the profit-mar  gin ratio, and 
       the return on investment ratio vary directly with 
       cyclical fluctua tions.
     • Accounts-receivable turnover does not appear to 
       be  related  to  cyclical  fluctua tions  in  any 
       discernible manner.