Schedule III Ratios & Additional Regulatory Information
- Every company filing financial statements under Schedule III of the Companies Act 2013 must compute and disclose 11 specific financial ratios in the notes to accounts.
- The ratios are not optional footnotes — auditors flag missing or incorrect ratios, and the MCA can reject financial statements that omit them.
- Small private limited companies are equally bound by these rules; there is no size-based exemption from ratio disclosure.
- Which 11 Ratios Does Schedule III Actually Require?
- Worked Example: Computing Schedule III Ratios for a Small Manufacturer
- The 25% Variance Explanation Rule — What It Actually Means
- Other Additional Regulatory Disclosures Introduced Alongside the Ratios
- Common Mistakes Companies Make With Schedule III Ratios
- Who Signs Off and What Happens If You Get It Wrong?
If your company files financial statements under the Companies Act 2013, Schedule III now requires you to disclose 11 specific financial ratios — not as a management exercise, but as a statutory obligation in the notes to accounts. The Ministry of Corporate Affairs amended Schedule III in March 2022, and these disclosures apply to all companies (including small private limited companies) for financial years ending on or after 1 April 2022. Get them wrong or leave them out, and your auditor will qualify the report. Here is exactly what you need to compute, how to compute it, and where most companies trip up.
Which 11 Ratios Does Schedule III Actually Require?
The amended Schedule III (Division I for companies following AS, Division II for Ind AS companies) mandates disclosure of the following ratios along with a comparison to the previous year and an explanation for any change exceeding 25% either way.
| # | Ratio Name | Formula (simplified) | Relevant for |
|---|---|---|---|
| 1 | Current Ratio | Current Assets ÷ Current Liabilities | All companies |
| 2 | Debt-Equity Ratio | Total Debt ÷ Shareholders' Equity | All companies |
| 3 | Debt Service Coverage Ratio (DSCR) | Earnings available for debt service ÷ Debt service | All companies |
| 4 | Return on Equity (ROE) | Net Profit after Tax ÷ Average Shareholders' Equity | All companies |
| 5 | Inventory Turnover Ratio | Cost of Goods Sold ÷ Average Inventory | Companies holding inventory |
| 6 | Trade Receivables Turnover Ratio | Net Credit Sales ÷ Average Trade Receivables | Companies with credit sales |
| 7 | Trade Payables Turnover Ratio | Net Credit Purchases ÷ Average Trade Payables | Companies with credit purchases |
| 8 | Net Capital Turnover Ratio | Net Sales ÷ Working Capital | All companies |
| 9 | Net Profit Ratio | Net Profit after Tax ÷ Net Sales | All companies |
| 10 | Return on Capital Employed (ROCE) | EBIT ÷ Capital Employed | All companies |
| 11 | Return on Investment (ROI) | Income from Investments ÷ Cost of Investments | Companies holding investments |
If a ratio is not applicable (for example, a service company with no inventory), the company should state "not applicable" and briefly explain why — not simply leave the row blank.
Worked Example: Computing Schedule III Ratios for a Small Manufacturer
Let us take Mehta Packaging Pvt Ltd, a small private limited company, with the following figures for FY 2025-26:
- Net Sales: ₹48,00,000
- Cost of Goods Sold: ₹32,00,000
- Net Profit after Tax: ₹4,80,000
- EBIT: ₹7,20,000
- Current Assets: ₹18,00,000
- Current Liabilities: ₹9,00,000
- Total Debt (long-term + short-term borrowings): ₹12,00,000
- Shareholders' Equity (average): ₹20,00,000
- Capital Employed (Total Assets − Current Liabilities): ₹36,00,000
- Average Inventory: ₹8,00,000
- Average Trade Receivables: ₹6,00,000
Here is the arithmetic for the key ratios:
- Current Ratio: ₹18,00,000 ÷ ₹9,00,000 = 2.00
- Debt-Equity Ratio: ₹12,00,000 ÷ ₹20,00,000 = 0.60
- Net Profit Ratio: ₹4,80,000 ÷ ₹48,00,000 = 10%
- ROCE: ₹7,20,000 ÷ ₹36,00,000 = 20%
- Inventory Turnover: ₹32,00,000 ÷ ₹8,00,000 = 4 times
- Trade Receivables Turnover: ₹48,00,000 ÷ ₹6,00,000 = 8 times
- ROE: ₹4,80,000 ÷ ₹20,00,000 = 24%
Now compare each ratio to the previous year figure. If the Current Ratio was 1.5 last year and is 2.0 this year, that is a 33% increase — which crosses the 25% threshold. Mehta Packaging must add a note explaining the reason (perhaps they collected receivables faster or reduced short-term borrowings).
The 25% Variance Explanation Rule — What It Actually Means
This is the clause most companies overlook. Schedule III requires a written explanation whenever any ratio moves by more than 25% compared to the previous year. The explanation must appear in the notes to accounts — not in a separate management letter, not verbally to the auditor.
The explanation should be specific: "Inventory Turnover Ratio declined from 6x to 3x because the company built up raw material stock in Q4 FY 2026 anticipating a supplier price increase." A vague statement like "business conditions changed" will not satisfy a diligent auditor.
Other Additional Regulatory Disclosures Introduced Alongside the Ratios
The March 2022 amendment to Schedule III bundled the ratio disclosures with several other new disclosure requirements. These are equally mandatory:
- Undisclosed income: Companies must state whether any proceedings are pending or completed under the Benami Transactions (Prohibition) Act or whether the company has surrendered undisclosed income during searches under the Income Tax Act.
- Wilful defaulter status: A declaration whether the company or any of its promoters/directors have been declared wilful defaulters by any bank or financial institution.
- Relationship with struck-off companies: Details of transactions with companies struck off under Section 248 of the Companies Act 2013 during the year.
- Crypto and virtual digital assets: If the company has traded in or holds cryptocurrency or virtual digital assets, the nature, amount, and purpose must be disclosed.
- CSR disclosures: Applicable companies must disclose the CSR obligation, amount spent, and unspent amounts transferred to the designated fund.
- Utilisation of borrowed funds: Whether funds raised through borrowings were used for the stated purpose, and whether any funds were advanced to ultimate beneficiaries other than subsidiaries.
For companies with complex balance sheets, preparing these disclosures alongside the ratios is significantly easier when your balance sheet is structured correctly from the start. The Balance Sheet tool on KyaTax can help you organise figures in the Schedule III format before your CA finalises the accounts.
Common Mistakes Companies Make With Schedule III Ratios
- Using closing inventory instead of average inventory. The Inventory Turnover Ratio requires average inventory — opening plus closing divided by two. Using only the year-end figure skews the ratio, especially for seasonal businesses.
- Including all sales (not just credit sales) in the Trade Receivables Turnover Ratio. Cash sales should be excluded from the numerator. Mixing them in makes the ratio look artificially better than it is.
- Ignoring the "not applicable" obligation. A service company that simply omits the Inventory Turnover row without explanation will receive an audit observation. Always state N/A with a reason.
- Forgetting the previous year comparatives. Schedule III requires the current year ratio AND the previous year ratio side by side. First-year filers often skip the comparative column entirely.
- Missing the 25% variance explanation entirely. Many companies compute the ratios correctly but do not check whether any ratio has moved beyond the 25% threshold, and therefore provide no explanation. Auditors check this systematically.
Who Signs Off and What Happens If You Get It Wrong?
The Board of Directors approves the financial statements, so incorrect or missing ratio disclosures are ultimately the Board's responsibility — not just the auditor's. The auditor is required to report non-compliance as a qualification or emphasis of matter in the audit report. The MCA's Scrutiny division can also flag non-compliant financial statements filed with the ROC, potentially triggering notices under Section 137 or Section 134 of the Companies Act 2013. Penalties under the Act for non-compliance with financial statement requirements can apply to both the company and its officers in default.
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Open Balance Sheet tool →Frequently asked questions
Are Schedule III ratio disclosures required for a One Person Company (OPC)?
Yes. OPCs are companies under the Companies Act 2013 and are required to follow Schedule III. They must compute and disclose all applicable ratios in their notes to accounts, along with prior year comparatives.
What denominator should I use for Debt-Equity Ratio — total equity or only paid-up capital?
Use total shareholders' equity, which includes paid-up share capital, securities premium, retained earnings, and all other reserves. Do not use only paid-up capital, as that significantly understates the equity base and overstates the ratio.
Does a company with no borrowings still need to disclose the Debt-Equity Ratio and DSCR?
Yes, but the value will be zero (or not meaningful for DSCR). You should state the ratio as zero or nil and note that the company has no debt. Do not omit the row — omission reads as non-compliance to a scrutinising auditor.
How is "earnings available for debt service" computed for the DSCR?
It is typically computed as Net Profit after Tax plus Non-Cash Charges (depreciation, amortisation) plus Finance Costs (interest). Debt service is the total of principal repayments and interest paid during the year. The ratio tells lenders how comfortably the company can service its debt from operating earnings.
General information for FY 2026-27, not professional advice for your specific case. Rules change — verify against the latest notification or ask a KyaTax expert.
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