The Companies in India requires to prepare their financial statements in form of Schedule III to the Companies Act, 2013. Schedule III of Companies Act, 2013 came into force with effect from the 1st April, 2014 vide Notification S.O.902(E), dated 26th March 2014 and subsequently amended vide
1.Notification G.S.R. 679(E), dated 4th September 2015,
2.Notification G.S.R. 404(E), dated 6th April 2016
3. Notification G.S.R. 1022(E), dated 11th October, 2018
4. Notification G.S.R. 207(E), dated 24th March, 2021.
FOLLOWING RATIOS TO BE DISCLOSED
| Ratio | Meaning | Formula |
| Current Ratio | It is also known as the Working Capital Ratio, measures the capability of a business to meet its short-term obligations that are due within a year.
The ratio considers the weight of total current assets versus total current liabilities It indicates the financial health of a company and how it can maximize the liquidity of its current assets to settle debts and payables |
Current Assets / Current Liabilities
Note:- A very high current ratio may indicate that a company is leaving excess cash unused rather than investing in growing its business |
| Debt Equity Ratio | It reflects the ability of shareholder equity to cover all outstanding debts in the event of a business downturn.
The debt-to-equity ratio is a particular type of gearing ratio High leverage ratios tend to indicate a company or stock with higher risk to shareholders. |
Total Liabilities / Total Shareholders’ Equity
Note:- When using the D/E ratio, it is very important to consider the industry in which the company operates. Because different industries have different capital needs and growth rates, a relatively high D/E ratio may be common in one industry, while relatively a low D/E may be common in another |
| Debt Service Coverage Ratio | It is a measurement of a firm’s available cash flow to pay current debt obligations. The DSCR shows investors whether a company has enough income to pay its debts
A DSCR greater than 1 means the entity whether an individual, company or government has sufficient income to pay its current debt obligations |
Net Operating Income / Total Debt Service
Where:- 1. Net Operating Income = Revenue – Certain Operating Expenses 2. Total Debt Service = Current debt obligations |
| Return on Equity Ratio | ROE is a measure of financial performance calculated by dividing net income by shareholders’ equity
ROE is considered a gauge of a corporation’s profitability and how efficient it is in generating profits |
Net Income / Average Shareholders’ Equity
Note:- Net Income is the amount of income, net expenses, and taxes that a company generates for a given period. Average Shareholders’ Equity is calculated by adding equity at the beginning of the period. The Beginning and end of the period should coincide with the period during which the net income is earned |
| Inventory Turnover Ratio | It measures how many times in a given period a company is able to replace the inventories that it has sold.
A slow turnover implies weak sales and possibly excess inventory, while a faster ratio implies either strong sales or insufficient inventory High volume, low margin industries such as retailers and supermarkets tend to have the highest inventory turnover Calculating Inventory turnover can help businesses make better decisions on pricing, manufacturing, marketing and purchasing new inventory |
Cost of Goods Sold / Average value of inventory |
| Trade Receivable Turnover Ratio | A high receivables turnover ratio can indicate that’s a company collection of accounts receivable is efficient and that it has a high proportion of quality customers who pay their debts quickly
A company could improve its turnover ratio by making changes to its collection process. A company could also offer its customers discounts for paying early. Investors should be mindful that some companies use total sales rather than net sales to calculate their ratios, which may inflate the results. |
Net Credit Sales / Average Accounts Receivables
Note:- An efficient has a higher accounts receivable turnover ratio while an inefficient company has a lower ratio |
| Trade Payable Turnover Ratio | Accounts payable are short-term debt that a company owes to its suppliers and creditors. The accounts payable turnover ratio shows how efficient a company is at paying its suppliers and short-term debts.
Ideally, a company wants to generate enough revenue to pay off its accounts payable quickly, but not so quickly, the company misses out an opportunity because they could use that money to invest in other endeavours. Creditors can use the ratio to measure whether to extend a line of credit to the company. |
Total supply purchases / { ( Beginning Accounts Payable + Ending Accounts Payable ) / 2 }
Note:- A decreasing turnover ratio indicates that a company is taking longer to pay off its suppliers than in previous periods. The rate at which a company pays its debts could provide an indication of the company’s financial condition. |
| Net Capital Turnover Ratio | It measures how efficiently a company is using its working capital to support sales and growth.
It measures the relationship between the funds used to finance a company’s operations and the revenues a company generates to continue operations and turn a profit. A higher working capital turnover ratio is better, and indicates that a company is able to generate a larger amount of sales. If ratio rises too high, it could suggest that a company needs to raise additional capital to support future growth otherwise the company could become insolvent in the near future unless it raises additional capital to support that growth. |
Net Annual Sales / Average Working Capital
Note:- Net Annual Sales is the sum of a company’s gross sales minus its returns, allowances and discounts over the course of a year. Average working capital is average current assets less average current liabilities. |
| Net Profit Ratio | It measures how much net income is generated as a % of revenues received.
It is one of the most important indicators of a company’s overall financial health. It helps investors assess if a company’s management is generating enough profit from its sales and whether operating costs and overhead costs are being contained Companies that can expand their net margins over time are generally rewarded with share price growth, as share price growth is typically highly correlated with earnings growth. |
{ Net Income / Revenue } * 100
Net income = { Revenue – Cost of Goods Sold – Operating & Other Expenses – Interest – Taxes } It can be influenced by one-off items such as the sale of an asset, which would temporarily boost profits |
| Return on Capital Employed | It is a financial ratio that can be used to assess a company’s profitability and capital efficiency.
It is one of several profitability ratios financial managers, stakeholders and potential investors may use when analysing a company for investment Some analyst prefer return on capital employed over return on equity (ROE) and return on assets (ROA) because return on capital considers both debt and equity financing |
Earnings before Interest and Tax / Capital Employed
Capital Employed = ( Total Assets – Current liabilities A higher return on capital employed suggest a more efficient company, at least in terms of capital employment |
| Return on Investment | It is a performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments.
If an investment’s ROI is net positive, it is probably worthwhile. But if other opportunities with higher ROIs are available, these signals can help investors eliminate or select the best options. Likewise, investors should avoid negative ROIs, which imply a net loss |
{ Current value of Investment – Cost of Investment } / Cost of Investment |
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