Proprietary Ratio or Equity Ratio:
Definition:
This is a variant of the
debttoequity ratio.
It is also known as equity ratio or net worth to total assets ratio.
This ratio
relates the shareholder's funds to total assets. Proprietary / Equity ratio
indicates the longterm or future solvency position of the business.
Formula of Proprietary/Equity Ratio:
Proprietary or Equity Ratio =
Shareholders funds / Total Assets
Components:
Shareholder's funds include equity share capital plus all reserves and
surpluses items. Total assets include all assets, including Goodwill. Some
authors exclude goodwill from total assets. In that case the total shareholder's
funds are to be divided by total tangible assets. As the total assets are always
equal to total liabilities., the total liabilities, may also be used as the
denominator in the above formula.
Example:
Share holders funds are $1,800,000 and the total assets, which are equal to
total liabilities are $3,000,000.
Calculate proprietary
ratio or Equity ratio.
Calculation:
Proprietary or Equity Ratio = 1,800,000 / 3,000,000
This means that out of every $1 employed in the business, shareholders
contribution is about 60 cents. Accordingly, the creditors contribution would be
the remaining 40 cents. Significance:
This ratio throws light on the general financial strength of the company. It
is also regarded as a test of the soundness of the capital structure. Higher the
ratio or the share of shareholders in the total capital of the company, better
is the longterm solvency position of the company. A low proprietary ratio will
include greater risk to the creditors.
This ratio may be further analyzed
into the following two ratios:

Ratio of fixed assets to shareholders/proprietors' funds

Ratio of current assets
to shareholders/proprietors' funds
