Mandatory Requirement for Disclosure of Accounting Ratios in the Financial Statements
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- Last Updated on 29 August, 2022
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In order to bring greater transparency in the financial statements, an amendment to Schedule III to the Companies Act, 2013 was introduced by the MCA. Wherein, several new disclosures that are grouped under “Additional Regulatory Information” (ARI) were mentioned. Disclosure of the following 11 key accounting ratios is one of the disclosures specified under ARI. It is mandatory to be provided in the Financial Statements:
(a) Current ratio
(b) Debt-equity ratio
(c) Debt service coverage ratio
(d) Return on equity ratio
(e) Inventory turnover ratio
(f) Trade receivables turnover ratio
(g) Trade payables turnover ratio
(h) Net capital turnover ratio
(i) Net profit ratio
(j) Return on capital employed
(k) Return on investment
Along with the disclosure, an explanation with respect to change in such ratios by more than 25% (whether positive or negative) in comparison to the preceding year’s ratio, shall also be provided.
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how to calculate return on investment
Return on investment (ROI) is a financial ratio used to calculate
the benefit an investor will receive in relation to their investment
cost. The higher the ratio, the greater the benefit earned. The one
of widely used methods is Time Weighted Rate of Return (TWRR)
and the same should be followed to calculate ROI. It adjusts the
return for the timing of investment cash flows and its formula /
method of calculation is commonly available. However, the same
is given below for quick reference:
{MV(T1) – MV(T0) – Sum [C(t)]}
ROI = _________________________
{MV(T0) + Sum [W(t) * C(t)]}
where,
T1 = End of time period
T0 = Beginning of time period
t = Specific date falling between T1 and T0
MV(T1) = Market Value at T1
MV(T0) = Market Value at T0
C(t) = Cash inflow, cash outflow on specific date
W(t) = Weight of the net cash flow (i.e. either net inflow or net
outflow) on day ‘t’, calculated as [T1 – t] / T1
Companies may provide ROI separately for each asset class
(e.g., equity, fixed income, money market, etc.).