This ratio shows the proportion of total assets of a company which are financed by proprietors’ funds. Proprietary ratio is also known as equity ratio. It helps to determine financial strength of a company & is useful for creditors to assess the ratio of shareholder’s funds employed out of total assets employed in 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.
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
Example of Proprietary Ratio
From the balance sheet of Unreal Corporation calculate its proprietary ratio
|Share Capital||10,00,000||Tangible Assets||10,00,000|
|Reserves & Surplus||2,00,000||Long-Term Investments||5,00,000|
|Trade Payable||4,00,000||Trade Receivable||70,000|
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 asset or in other words 73% of total assets of the company are financed by proprietors’ funds.
High & Low Proprietary Ratio
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 in financial analysis, a higher ratio, say more than 75% means sufficient comfort for creditors since it points towards lesser dependence on external sources.
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.