Ratio Formulas explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Annexure B does not standardise the ratios — it gives a reference formula for each, and a fallback for the companies that cannot compute an average.
Liquidity and leverage ratio formulas
| Ratio | Formula | What it indicates |
|---|---|---|
| Current ratio | Current Assets ÷ Current Liabilities | A company's overall liquidity position; widely used by banks in making decisions regarding the advancing of working capital credit |
| Debt–equity ratio | Total Debt ÷ Shareholder's Equity | Compares total debt to shareholders' equity; both numbers can be found in a company's balance sheet |
| Debt service coverage ratio | Earnings available for debt service ÷ Debt service | The firm's ability to pay off current interest and instalments |
Earning for Debt Service = Net Profit after taxes + Non-cash operating expenses like depreciation and other amortizations + Interest + other adjustments like loss on sale of Fixed assets etc.
Debt service = Interest & Lease Payments + Principal Repayments.
And the definition that keeps the two ends consistent: "Net Profit after tax" means the reported amount of "Profit / (loss) for the period" and it does not include items of other comprehensive income.
Two features are worth noticing. Interest is added back in the numerator and included in the denominator, because the question is whether earnings before financing cost can cover that financing cost. And the denominator includes principal repayments, which never appear in the statement of profit and loss at all — which is why this ratio can deteriorate sharply in a year when a bullet repayment falls due, with no change in reported profit.
Return ratio formulas
- Return on equity (ROE) = (Net Profits after taxes − Preference Dividend, if any) ÷ Average Shareholder's Equity. It measures the profitability of equity funds invested in the company, revealing how the profitability of the equity-holders' funds has been utilized and the percentage return generated to equity-holders.
- Return on capital employed (ROCE) = Earnings before interest and taxes ÷ Capital Employed, where Capital Employed = Tangible Net Worth + Total Debt + Deferred Tax Liability. It indicates the ability of a company's management to generate returns for both the debt holders and the equity holders — the higher the ratio, the more efficiently capital is being employed.
- Net profit ratio = Net Profit ÷ Net Sales, where net profit shall be after tax and net sales shall be calculated as total sales minus sales returns.
Turnover ratio formulas and the fallback
| Ratio | Formula | Fallback where averages are unavailable |
|---|---|---|
| Inventory turnover (also known as stock turnover) | Cost of goods sold OR sales ÷ Average Inventory, where average inventory is (Opening + Closing balance) / 2 | Divide COGS or Sales by the closing balance of inventory |
| Trade receivables turnover | Net Credit Sales ÷ Avg. Accounts Receivable, where net credit sales consist of gross credit sales minus sales return and trade receivables includes sundry debtors and bills receivables | Divide total sales by the closing balance of trade receivables |
| Trade payables turnover | Net Credit Purchases ÷ Average Trade Payables, where net credit purchases consist of gross credit purchases minus purchase return | Divide total purchases by the closing balance of trade creditors |
| Net capital turnover | Net Sales ÷ Working Capital, where working capital shall be calculated as current assets minus current liabilities | — |
The fallback is the practical part of Annexure B. All three turnover ratio formulas prefer an average and a credit-only figure; where the information about credit sales or purchases and the opening and closing balances is not available, the ratio is computed on totals and closing balances instead.
Return on investment
Return on investment (ROI) is a financial ratio used to calculate the benefit an investor will receive in relation to their investment cost. The higher the ratio, the greater the benefit earned. One widely used method is the Time Weighted Rate of Return (TWRR) and the same should be followed to calculate ROI. It adjusts the return for the timing of investment cash flows:
ROI = {MV(T1) − MV(T0) − Sum} ÷ {MV(T0) + Sum}
- T1 = End of time period; T0 = Beginning of time period; t = a specific date falling between them
- MV(T1), MV(T0) = Market Value at those dates
- C(t) = Cash inflow or outflow on a specific date
- W(t) = Weight of the net cash flow on day t, calculated as / T1
Companies may provide ROI separately for each asset class — for example equity, fixed income, money market.
Common mistakes
- Including other comprehensive income in net profit after tax for debt service coverage.
- Omitting principal repayments from debt service.
- Using closing balances where opening balances are in fact available.
- Computing ROE before deducting preference dividend.