Schedule III Financial Ratios: the 11 mandatory ratios (Division I)
By Sudheer Lokanadham, Chartered Accountant · Updated 29/06/2026 · 8 min read
The Schedule III financial ratios are the eleven ratios that companies must disclose in the notes to the financial statements under Division I of Schedule III to the Companies Act, 2013. Introduced by the amendment dated 24 March 2021 and effective from FY 2021-22, the disclosure requires each ratio to be shown with its numerator, its denominator, the ratio itself, the percentage change against the previous year, and a written explanation wherever that change exceeds 25%.
Where this disclosure sits
The ratios form part of the additional regulatory information that the 2021 amendment added to the notes. They appear alongside the other new disclosures of that amendment, such as ageing schedules for trade receivables, trade payables and capital work-in-progress. The requirement applies to companies preparing accounts under Division I (Accounting Standards) and, in substantially the same form, to companies under Division II (Ind AS).
The 11 mandatory ratios at a glance
The table below sets out each ratio with its prescribed numerator and denominator. These are the commonly accepted, illustrative formulae per ICAI guidance — the amendment names the ratios but does not rigidly fix every formula, so apply a consistent and defensible basis across periods.
| Ratio | Numerator | Denominator |
|---|---|---|
| 1. Current Ratio | Current Assets | Current Liabilities |
| 2. Debt-Equity Ratio | Total Debt | Shareholder's Equity |
| 3. Debt Service Coverage Ratio | Earnings available for debt service | Debt service (interest + principal repayments) |
| 4. Return on Equity (ROE) | Net profit after tax − Preference dividend | Average Shareholder's Equity |
| 5. Inventory Turnover Ratio | Cost of goods sold (or Sales) | Average Inventory |
| 6. Trade Receivables Turnover Ratio | Net credit sales | Average trade receivables |
| 7. Trade Payables Turnover Ratio | Net credit purchases | Average trade payables |
| 8. Net Capital Turnover Ratio | Net sales | Working capital (Current assets − Current liabilities) |
| 9. Net Profit Ratio | Net profit | Net sales |
| 10. Return on Capital Employed (ROCE) | Earnings before interest and taxes (EBIT) | Capital employed (Tangible net worth + Total debt + Deferred tax liability) |
| 11. Return on Investment (ROI) | Income from investment | Cost of investment |
What each ratio tells you
Liquidity and solvency
- Current Ratio measures short-term liquidity — whether current assets can meet current liabilities as they fall due.
- Debt-Equity Ratio shows financial leverage, comparing total debt against owners' funds.
- Debt Service Coverage Ratio tests whether earnings available for debt service can cover interest plus scheduled principal repayments.
Profitability and return
- Return on Equity (ROE) measures profit earned for shareholders after tax and preference dividend, against average equity.
- Net Profit Ratio expresses net profit as a proportion of net sales.
- Return on Capital Employed (ROCE) measures operating return (EBIT) on the total capital employed in the business.
- Return on Investment (ROI) measures the return generated on invested funds.
Activity and efficiency
- Inventory Turnover Ratio shows how quickly inventory is sold and replaced.
- Trade Receivables Turnover Ratio shows how efficiently credit sales are collected.
- Trade Payables Turnover Ratio shows how quickly the company pays its suppliers.
- Net Capital Turnover Ratio relates net sales to working capital, indicating how hard working capital is being worked.
The 25% variance explanation rule
For every ratio, the company must present the percentage change against the immediately preceding year. Where that change exceeds 25%, a written explanation is mandatory in the notes. This is one of the most scrutinised parts of the disclosure during audit and review, so the reasons given should be specific and tie back to actual events in the year.
The percentage change is computed on the ratio itself:
- Percentage change = (Current-year ratio − Previous-year ratio) ÷ Previous-year ratio × 100.
- If the result, ignoring its sign, is more than 25%, an explanation is required.
How to prepare the disclosure, step by step
- Pull the numerator and denominator figures for each of the eleven ratios from the finalised financial statements, using a consistent formula basis.
- Compute the current-year ratio and the previous-year ratio on the same basis.
- Calculate the percentage change of each ratio versus the previous year.
- Flag every ratio whose absolute percentage change exceeds 25%.
- Draft a specific, factual explanation for each flagged ratio — for example, a new term loan raised, a one-off impairment, or a sharp change in sales mix.
- Present all eleven ratios in the notes with numerator, denominator, both years' figures, the percentage change, and the explanations where required.
Common pitfalls
- Changing the formula between years. Use the same numerator and denominator definitions across periods, otherwise the comparative and the variance percentage are not meaningful.
- Generic explanations. “Due to business operations” is not an explanation. Identify the actual driver of the movement.
- Missing the threshold by ignoring sign. A 30% fall is just as reportable as a 30% rise — the test is on the magnitude of the change.
- Omitting ratios where data is nil. Disclose all eleven even where a component is nil, with an appropriate note, rather than dropping the line.
Related guides
Frequently asked questions
Which 11 ratios must be disclosed under Schedule III?
Current ratio, debt-equity ratio, debt service coverage ratio, return on equity, inventory turnover, trade receivables turnover, trade payables turnover, net capital turnover, net profit ratio, return on capital employed, and return on investment. All eleven must be shown in the notes with numerator, denominator, the ratio itself, and the percentage change against the previous year.
When did the Schedule III ratio disclosure become mandatory?
The requirement came in through the Schedule III amendment dated 24 March 2021 and applies from financial year 2021-22 onwards. It forms part of the additional regulatory information in the notes and applies to companies preparing financial statements under Division I (Accounting Standards) as well as Division II (Ind AS).
What is the 25% variance explanation rule?
Where any ratio changes by more than 25% compared with the immediately preceding year, the company must give an explanation for that change in the notes. The threshold is checked on the percentage change in the ratio, not on the absolute numerator or denominator. This explanation is one of the most heavily scrutinised parts of the disclosure during audit and review.
Are the Schedule III ratio formulas fixed by the standard?
The amendment names the eleven ratios but does not rigidly prescribe every numerator and denominator. The formulas commonly used are the illustrative ones set out in ICAI guidance, such as the Guidance Note on Division I. Companies should apply a consistent, defensible formula and use the same basis across periods so the comparatives and variance percentages are meaningful.
How is the percentage change in a ratio calculated?
Percentage change equals the current-year ratio minus the previous-year ratio, divided by the previous-year ratio, expressed as a percentage. A positive figure means the ratio improved or rose; a negative figure means it fell. If the absolute percentage change exceeds 25%, a written explanation is mandatory in the notes.
Do the ratio disclosures apply in the first year of a company?
In the first financial year there is no previous-year ratio to compare against, so the percentage change and the variance explanation cannot be computed. The current-year ratio, numerator and denominator are still disclosed. From the second year onward, the comparative column and the 25% variance test apply in full.
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