J P Chawla & Co. LLP

The Ultimate Guide to Analytical Ratios in context with Schedule III Balance Sheet

In the maze of business metrics, analytical ratios stand tall as the navigational metric guiding analysts, investors, and even business owners. This comprehensive guide shines a spotlight on the nuances of these ratios, particularly within the framework of the Schedule III balance sheet.

Introduction to Analytical Ratio

In the ever-evolving business landscape, numbers and metrics are omnipresent. Among them, analytical ratios deftly decode the health and performance of an enterprise.

Consider them as financial superheroes, each with unique powers to illuminate different facets of a business. From revealing liquidity strengths to showcasing profitability prowess, these ratios have got it all covered.

The Rich Tapestry of Balance Sheets

To the untrained eye, balance sheets might seem like mere tables filled with numbers. But for those who know where to look, they’re goldmines of information. Here’s a breakdown:

  • Liquidity Ratios: A quick pulse-check on a company’s ability to settle short-term dues.
  • Solvency Ratios: The long-game players assessing long-term stability.
  • Profitability Ratios: The scorekeepers of how efficiently a company churns out profits.

Dive deeper, and myriad factors come into play. From tangible machinery to intangible goodwill, each element tweaks these ratios, painting a picture of the company’s financial canvas.

The Schedule III Balance Sheet:

The Schedule III balance sheet isn’t just another statement: it’s a meticulously crafted statements of facts ensuring uniformity in financial reporting. By adhering to GAAP, it brings consistency, clarity, and comparability to the financial universe. Think of it as a translator, turning complex financial data into an understandable narrative.

What are Analytical Ratio

Decoding Company Finances: The Power of Ratios

Think of analytical ratios as financial health trackers for companies. Just as we might use a fitness app to check our daily steps or sleep patterns, companies use these ratios to gauge their financial wellbeing.

So, what are these ratios 

They’re simple tools that take numbers from company reports and turn them into easy-to-understand percentages or figures. These figures help us see how well a company is doing in terms of making money, paying off debts, and managing assets.

Why are they important

For anyone keen to invest in a company or understand its performance, these ratios are super handy. They paint a picture of a company’s strength, efficiency, and growth possibilities.

In short, these financial ratios make understanding company numbers much easier, helping people decide whether it’s a good company to invest in or work with!

Current Ratio:

Analyzing a company’s short-term financial health is important to financial analysts. The current ratio, which measures liquidity, is a key analytical ratio used for this purpose. It’s calculated by dividing current assets by current liabilities, providing insight into the company’s ability to meet its short-term obligations.

What if its high?

A high current ratio indicates good liquidity, while a low one may indicate liquidity issues. Analysts also consider other ratios such as debt-equity and return on equity to gain a holistic understanding of a company’s financial position.

Debt-Equity Ratio:

Analyzing a company’s financial leverage can be done through the debt-equity ratio. This ratio is calculated by dividing the total debt by the shareholders’ equity. It provides insights into the proportion of debt financing compared to equity financing, indicating the level of financial risk.

What if its high?

A high debt-equity ratio suggests higher financial risk, while a low ratio indicates lower risk. Financial analysts utilize this ratio to assess a company’s solvency and evaluate its capital structure. By analyzing the debt-equity ratio, they gain a better understanding of a company’s ability to repay its debts and the level of reliance on borrowed funds.

How does it help more?

This ratio helps in evaluating the company’s long-term financial stability and its capacity to absorb financial stress. Assessing the debt-equity ratio aids in making informed decisions about a company’s financial position and potential investment opportunities.

Debt Service Coverage Ratio:

Assessing a company’s financial stability means checking its ability to pay debts. To do this, we use analytical ratios like the debt service coverage ratio. This ratio shows if a company can generate enough money to pay off its debts.

How we get this ratio?

We get this ratio by dividing the operating income by the total debt service obligations. A higher ratio means that the company is financially strong and can meet its debt obligations.

On the other hand, a lower ratio indicates potential risks and financial distress. Analysts use this ratio to check a company’s financial health and whether it can pay off its debts. Investors and creditors also use this ratio to see how good a company manages its debts and its overall financial stability.

Return on Equity (ROE)

Return on Equity (ROE) is an important ratio that measures a company’s profitability. ROE shows how well a company makes profits from its investment. A higher ROE means better profits and efficient use of resources.

Why do analysts use it?

Analysts use ROE to see how a company performs compared to others in the industry. It helps them evaluate the company’s ability to make money for shareholders. ROE is crucial in financial analysis and provides insights into a company’s health and performance.

By looking at the ROE over time, we can understand trends in profitability. Comparing a company’s ROE with others in the same industry helps us understand its value and financial position.

More Ratios

Beyond these heavy hitters, there’s a rich ensemble of secondary ratios. The Inventory Turnover shines a torch on inventory management, while the Trade Receivables Turnover unpacks collection efficiencies.

1. Trade Payables Turnover Ratio: Are We Paying Bills on Time?

In simple terms, this ratio tells you how quickly a company pays its bills. It’s like checking if you’re paying your phone bill or rent on time every month. For a company, timely payments mean good relationships with suppliers.

2. Net Capital Turnover Ratio: Are We Using Our Money Wisely?

This ratio checks how effectively a company uses its money to make sales. Imagine it like this: if you invest in a bicycle to deliver packages, how many deliveries are you making? The more you make, the better your investment is. Similarly, a higher ratio means the company is efficiently using its assets.

3. Net Profit Ratio: Are We Really Making Money?

Think of this as understanding how much money you save after a month’s expenses. This ratio does the same for companies, showing how much profit they make after all expenses. The higher the profit, the better the company is at making money.

Financial ratios might seem like jargon, but they’re essential tools that give us a clear picture of a company’s health. It’s like piecing together a puzzle. Each ratio gives a different piece, and when combined, we get the full picture. So, the next time you hear about financial ratios, think of them as tools that make understanding complicated company finances just a little bit easier!

The Swings & Shifts

Ratios aren’t static; they ebb and flow, reflecting the business’s dynamism. Factors ranging from internal management strategies to external economic conditions can sway them. The ripple effect of an industry trend or a tweak in revenue can echo in these ratios, making them the perfect barometers of business health.

ROI and ROCE: The Titans of Investment Analytics

In the coliseum of financial metrics, Return on Investment (ROI) and Return on Capital Employed (ROCE) reign supreme. While ROI spotlights investment profitability, ROCE casts a wider net, encompassing all avenues. For discerning investors, these metrics are non-negotiables.

Navigating the Analytical Labyrinth: Best Practices

Diving deep into ratios requires a systematic approach. Start with the primary metrics, benchmark against industry standards, and then delve into secondary ratios for nuanced insights. Always view these ratios in tandem, never isolation. And remember, context is king. Factor in industry nuances, economic climate, and company size when interpreting them.


Why are Schedule III balance sheets essential?

They bring uniformity, ensuring that businesses speak the same financial language, promoting clarity and comparability.

How do I make sense of varying ratio values?

Dive into the company’s strategy, industry benchmarks, and economic context. Understand the stories behind the numbers.


Among financial analytics, each ratio plays a distinct note. Together, they create a symphony that narrates a company’s financial status. By attuning ourselves to it we’re better equipped to navigate the intricate realms of business finance, making decisions grounded in data and insights. Statutorily companies need to explain variance of more than 25% in the ratios from immediately preceding comparative period. So, the next time you encounter a Schedule III balance sheet, let the analytical ratios serenade you with tales of financial triumphs, trials, and trajectories!  

Contact us at contact@jpc.co.in for more insights.