In the beginning of nineteenth century essential improvement in ratio analysis occurred. In this period few developments are endogenous. First, large number of ratios was conceived in comparison to earlier periods. Second, proper ratio criteria were appeared. In this regard most famous was current ratio criterion. Third, different analysts understand the need of inter-firm analysis and for that purpose it felt the need for relative ratio criterion. Despite these developments ratio analysis has been used for analysis in this period and those felt the need of using ratio analysis only used current ratio.

Two very important exogenous developments in this period because of which need of ratios has surfaced were federal income tax code in 1913 and the establishment of the Federal Reserve System in 1914. These two developments also helped to improve the content of financial statements as well as increased the demand of financial statements.

In 1920s, interest in ratio analysis increased dramatically. Many publications on the topic of ratio analysis published during this period. Different credit agencies, trade unions, universities and individuals seeking analyses compiled industry data on ratio analysis.

Justin (1924) argued that the method of gathering industry data and calculates averages were called “Scientific ratio analysis”. The word “scientific” in this title was not entirely correct because no evidence had been found that the hypothesis formulation and hypothesis testing actually carried out.

Horrigan (1968) says ratios analysis has come into existence since early ages and the main reason of the development of ratio analysis was its use in the analysis of the properties of ratios in 300 B.C. in recent time it is used as a standard tool for the analysis of financial statement. In nineteenth century main reasons of using ratio analysis are power of financial institutions and shifting of management to professional managers. Ratio analysis used for two purposes that are credit and managerial. In managerial approach profitability and in credit approach capacity of firm to pay debts is the main point of focus. Generally, ratio analysis is used credit analysis.

There was rapid expansion of financial knowledge in nineteenth century and to study this rapidly expanding knowledge analyst first compared similar items then moved further and compared current assets and liabilities as well with other ratios. In that period current ratio was the most significant ratio among all other available ratios. To analyze the operating results dupont analysis is also used. The result divided into three parts and then compared with other companies to point out the problem and strong areas of business.

Bliss (1923) says basic relationship within the business is indicated by the ratios and developed complete model based on the ratios. The purpose model was not mature but inspired others to start working on this theory.

Different critics of ratio analysis also appeared. Gilman (1925) has following concerns on ratio analysis (1) ratios are bond with time and changed as time passed so cannot be interpreted (2) ratios are not natural measure for judging the performance companies manipulated them (3) ratios easily affect the mind of viewers and hide the actual position and (4) ratios swing widely that also affect the dependability.

Foulke (1931) create and promoted own set of financial ratios successfully. This set of financial ratios was printed and promptly known as important and prominent group of ratios.

Fitzpatrick (1932) with the help of thirteen different type of ratios analysis 120 failed firms and found that three out of thirteen ratios predict the failure of firms with precise accuracy while other ratios also shown some prediction power.

Rasmer and foster (1931) used eleven ratios to examine that the successful firms has higher ratios than unsuccessful firms. Although this study was immature but immaturity was ignored by considering the vital contribution this study has in the evaluation of usefulness of ratios. Security and exchange commission of America was formed in 1934. This also expands the flow and number of financial statements and with the help of this peripheral factor importance of ratio analysis further enhanced and realized.

Marwin (1942) by using several ratios analyze financial trends of huge successful and unsuccessful firms. Compared normal ratios of industry with mean rati