Companies Act, 2013--Recent Changes in Schedule III

Ratio Analysis Under Schedule III of the Companies Act

CA. L. Venkataramanan

In this write-up the learned author aims at seeking to analyse corporate finance ratios as per requirements of Schedule III of the Companies Act. While making ratio analysis he concludes that even though Schedule III prescribes the ratios that are needed to be disclosed, it is silent regarding the manner in which it is to be worked out. The above leads to subjectivity and difference in views regarding the manner in which it is to be done. These ratios are an additional disclosure which will be useful to the readers especially to the lenders while making any financial decisions relating to the company.

1. Introduction

Corporate finance ratios are quantitative measures that are used to assess businesses. These ratios are used by financial analysts, equity research analysts, investors and asset managers to evaluate the overall financial health of businesses, with the end goal of making better investment decisions. These ratios are generally given at the time of preparation of projections and other investment decisions, but now it is statutorily mandatory for the companies to give the ratio required under Schedule III of the Companies Act 2013. [Schedule III, Division I Point No .Y (xii)]. Further, the company shall explain the items included in numerator and denominator for computing the above ratios. The explanation shall also be provided for any change in the ratio by more than 25% when compared to preceeding year.

2. Schedule III requirements of Disclosure of Ratios

The Schedule III requires following ratios to be disclosed as a part of accounts for the year ended 31-3-2022. Further we have to work out the above ratio even for the year 2020-21 to give comparative figures for the ratios.

(a) Current ratio

(b) Debt Equity ratio

(c) Debt Service Coverage ratio

(d) Return on Equity ratio

(e) Inventory turnover ratio

(f) Trade Receivable turnover ratio