What is Proprietary Ratio?

Proprietary Ratio

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

Proprietary Ratio Formula

 

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

 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

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.