Eleven Analytical Ratios Under 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.
Schedule III requires eleven analytical ratios to be disclosed, with the items included in the numerator and denominator explained for each, and a further explanation for any change of more than 25% compared with the preceding year. Components must be consistent across the periods presented and with industry practice over time.
The eleven ratios
| # | Ratio |
|---|---|
| (a) | Current ratio |
| (b) | Debt-equity ratio |
| (c) | Debt service coverage ratio |
| (d) | Return on equity ratio |
| (e) | Inventory turnover ratio |
| (f) | Trade receivables turnover ratio |
| (g) | Trade payables turnover ratio |
| (h) | Net capital turnover ratio |
| (i) | Net profit ratio |
| (j) | Return on capital employed |
| (k) | Return on investment |
The three obligations attached to them
- Explain the components. "The company shall explain the items included in numerator and denominator for computing the above ratios."
- Explain a variance over 25%. "Further explanation shall be provided for any change in the ratio by more than 25% as compared to the ratio of preceding year."
- Keep the components consistent. Across periods presented, and with industry practice over time.
The Schedule names eleven ratios but does not define them. That is why obligation 1 exists: because the company chooses the components, it must state what it chose. Two companies can both disclose a "debt-equity ratio" on different definitions, and the disclosure of components is what makes each intelligible.
The guidance note adds a discipline that follows from this: the items in the numerator and denominator should be such that a reference to the respective line item in the financial statements or notes could be easily drawn. A ratio whose components cannot be traced to the face of the accounts fails that test.
Consistency — and what happens when you change a component
The guidance note is explicit on the mechanics:
"If there is any change in the current period in relation to any item in the numerator or denominator for any ratio, then the same change shall be made for the comparative period as well and a footnote shall be added to explain the change in the item along with the reason thereof."
So a change in definition is not a free choice made prospectively. It requires:
- restating the comparative on the new basis; and
- a footnote explaining the change and the reason.
This matters because it removes a way of managing the 25% disclosure. Redefining a component so that the ratio moves less than 25% does not work — the comparative moves with it.
The 25% rule in practice
The threshold is mechanical: compute the ratio for the current year and the preceding year, and where the change exceeds 25%, explain it.
| Point | Position |
|---|---|
| Direction | The rule speaks of "any change" — it catches improvements as well as deteriorations |
| Basis | Change in the ratio, against the preceding year's ratio |
| What the explanation must do | Explain the change — a bare statement that the ratio moved is not an explanation |
| Small denominators | Ratios with small or negative denominators can swing well past 25% on immaterial movements; the explanation should say so where that is the cause |
Not required at consolidated level
The guidance note states that the analytical ratios requirement is not relevant at the CFS level and the company need not disclose it in the consolidated financial statements. The same is stated for registration of charges or satisfaction with the Registrar of Companies.
This is a genuine saving in preparation effort, and it is regularly overlooked — groups that prepare the ratio table for both sets of accounts are doing work the Schedule does not ask for.
Practical preparation
- Fix the definitions once, in a documented policy, with each component mapped to a financial statement line item.
- Compute both years on the same definitions before looking at the variance.
- Identify the drivers of any move over 25% — the explanation should name the cause, not describe the movement.
- Where a definition changes, restate the comparative and footnote it.
- Sense-check against industry practice, which the guidance note requires the components to be consistent with.
- Omit the table from the CFS.
Compliance checklist
- Disclose all eleven ratios.
- State the numerator and denominator for each, traceable to a line item.
- Explain every change over 25%, in either direction, with the cause.
- Keep components consistent across periods and with industry practice.
- On a definition change, restate the comparative and footnote it.
- Do not include the ratio disclosure in the consolidated financial statements.
Common mistakes
- Disclosing ratios without stating their components.
- Components that cannot be traced to the financial statements.
- Explaining only adverse movements over 25%.
- Changing a definition prospectively without restating the comparative.
- Describing the movement instead of explaining the cause.
- Preparing the ratio table for the CFS.