This ratio shows the proportion of total assets of a company which are financed by proprietors’ funds. The proprietary ratio is also known as the 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 the total assets of the company.
The word “Proprietors” is a synonym for “owners of a business”, proprietors’ funds, 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
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
|Reserves & Surplus
Shareholders’ Funds/Total Assets
S/H Funds = 10,00,000 + 2,00,000
Total Assets = 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 assets or in other words, 73% of the 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 the 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.
Short Quiz for Self-Evaluation
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