Analytical Ratios 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 prescribes which ratios to disclose but not, in every case, exactly how to compute them — which is why the requirement to explain the numerator and denominator is not optional detail.
The eleven
- Current ratio
- Debt-equity ratio
- Debt service coverage ratio
- Return on equity ratio
- Inventory turnover ratio
- Trade receivables turnover ratio
- Trade payables turnover ratio
- Net capital turnover ratio
- Net profit ratio
- Return on capital employed
- Return on investment
The company shall explain the items included in numerator and denominator for computing the above ratios. Further explanation shall be provided for any change in the ratio by more than 25% as compared to the ratio of the preceding year.
The illustrative format
| Ratio | Numerator | Denominator | Current Period | Previous Period | % Variance | Reason for variance |
|---|---|---|---|---|---|---|
| Current Ratio | ||||||
| Debt-equity ratio | ||||||
| … through to Return on investment |
The commentary requirement covers any change (whether positive or negative) in the ratio by more than 25% as compared to the ratio of the preceding year — an improvement of 40% requires an explanation exactly as a deterioration of 40% does.
Because computation methodology is not fixed, three rules do the work instead.
Traceability. The items that are considered as part of the numerator and as part of the denominator should be such that a reference to the respective line item in the financial statements or notes could be easily drawn. A reader must be able to rebuild the ratio from the statements themselves.
Consistency across periods, with restatement. Items should be consistent for the periods presented and should also be consistent with the industry practice over time. And crucially: 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. Without that, a definitional change could manufacture — or conceal — a 25% movement.
Consistency across the annual report. Ratios presented in any other place in the annual report should be consistent with the ratios mentioned in the financial statements — the management discussion cannot run a different set of numbers from the notes.
Choosing the components
In order to determine the items to be included in numerator and denominator for any ratio, reference may be drawn from several sources — for example, the ratio's usage in common parlance, investor reports, industry reports, market research reports, and the approach of credit rating agencies.
There may be a need to factor in company-specific and sector-specific nuances that may require necessary modifications to the reference considered. The Guidance Note is explicit that items included in numerator and denominator of any ratio may not be standardized across companies, as the calculation methodology would be a matter of each company's facts and circumstances, nature of transactions, nature of industry or sector in which the company operates, or the applicable regulatory requirements that a company needs to comply with.
Not relevant in the CFS
The analytical ratios are among the three requirements that are not relevant at the CFS level, and hence the company need not disclose them in the CFS — alongside title deeds not held in the company's name and registration of charges with the ROC.
Common mistakes
- Disclosing ratios without stating what the numerator and denominator contain.
- Explaining only adverse movements beyond 25%.
- Changing a component in the current year without restating the comparative.
- Publishing different ratios in the management discussion and in the notes.