What is Proprietary Ratio?


Proprietary Ratio

This ratio shows the proportion of total assets of a company which are financed by proprietors’ funds. The proprietary ratio is also known as equity ratio. It helps to determine the financial strength of a company & is useful for creditors to assess the ratio of shareholders’ funds employed out of total assets of the company.

The word “Proprietors” is a synonym for “owners of a business”, proprietors’ fund, in this case, would only be the funds which belong to the owners/shareholders of the business. Proprietors’ funds are also known as Owners’ funds, Shareholders’ funds, Net Worth, etc.

 

Formula to Calculate Proprietary Ratio

Proprietary Ratio Formula

Proprietors’ funds or Shareholders’ funds = Share Capital + Reserves and Surplus

Total Assets = Includes total assets as per the balance sheet

Related Topic – Debt to Equity Ratio

Example of Proprietary Ratio

From the balance sheet of Unreal Corporation calculate its proprietary ratio

 Liabilities  Amt  Assets  Amt
 Share Capital  10,00,000  Tangible Assets  10,00,000
 Reserves & Surplus  2,00,000  Long-Term Investments  5,00,000
 Short-Term Borrowings  40,000  Stock  70,000
 Trade Payable  4,00,000  Trade Receivable  70,000
       
 Total  16,40,000  Total  16,40,000

Shareholders’ Funds/Total Assets

S/H Funds = 10,00,000 + 2,00,000

Total Assets = 16,40,000

12,00,000/16,40,000

Proprietary ratio = 0.73

A proprietary ratio of 0.73 shows that the company has 0.73 units of shareholders’ funds for each unit of total asset or in other words 73% of total assets of the company are financed by proprietors’ funds.

 

High & Low Proprietary Ratio

High – This ratio indicates the relative proportions of capital contribution by shareholders in comparison to the total assets of a company. It is used as a screening device for financial analysis, a higher ratio, say more than 75% means sufficient comfort for creditors since it points towards lesser dependence on external sources.

Low – Whereas, a lower ratio, say less than 60% means discomfort for creditors since it shows more dependence on external sources, a lower ratio can be seen as a threat and may increase unwillingness of creditors to extend credit to the company. A company should mix and balance its external and internal sources in a way that none of them is too high in comparison to the other.

 

>Read Stock Turnover Ratio



 

Most Viewed Articles