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Proprietary Ratio:

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Definition and Explanation:

Proprietary ratio (also known as Equity Ratio or Net worth to total assets or shareholder equity to total equity). Establishes relationship between proprietor's funds to total resources of the unit. Where proprietor's funds refer to Equity share capital and Reserves, surpluses and Tot resources refer to total assets.

Formula:

Following formula is used to calculate proprietary ratio:

 Proprietary ratio = Proprietor's funds / Total assets

This relationship highlights the fact as to what is the proportion of Proprietors and outsiders in financing the total business. Suppose, in a business total assets amount of $4,00,000 and Proprietors equity is $3,00,000 then

Proprietary ratio = 3,00,000 / 4,00,000 =  0.75 times.

or 75% meaning hereby that 25% of the funds have been supplied by the outside creditors.

Example:

From the balance sheet given below calculate the proprietary ratio.

Balance Sheet

Liabilities

$

Assets

$
Equity share capital 3,00,000 Fixed assets 2,00,000
Reserves & surplus 50,000 Current assets 1,00,000
Debentures 1,00,000 Good will 50,000
Creditors 50,000 Investment 1,50,000
 
 
  5,00,000   5,00,000
 
 

Solution:

Proprietary ratio = Proprietor's funds / Total assets

Where,

proprietor's funds = Share capital + Reserves and surplus

i.e.,  3,00,000 + 50,000 = 3,50,000 and total assets are 5,00,000

Hence the ratio is = 3,50,000 / 5,00,000 = 7 : 10

Note: Some accountants exclude intangible assets from the term total assets. If so, then assets are (5,00,000 - goodwill) = 4,50,600 in that case.

Proprietary = 3,50,000 / 4,50,000

= 7 : 9

More study material from this to
 

More study material from this topic:

Meanings, Nature and Usefulness of Ratios Analysis
Interpretation of Ratios
Important Factors for Understanding Ratios Analysis
Significance and Usefulness Ratios Analysis
Classification of Ratios
Analysis of Short Term Financial Position or Test of Liquidity
Current Ratio
Quick/Acid Test/Liquid Ratio
Absolute Liquid Ratio
Inventory/Stock Turnover Ratio
Debtors / Receivable Turnover Ratio
Creditors / Payables Turnover Ratio
Working Capital Turnover Ratio
Profitability Ratios
Gross Profit Ratio (GP Ratio)
Operating Profit Ratio
Net profit ratio (NP ratio)
Earnings Per Share Ratio
Operating ratio
Expense ratio
Solvency ratios - Test of Long Term Solvency
Debt-equity Ratio
Debt Service Ratio or Interest Coverage Ratio
Fixed Assets Ratio
Debts to Total Funds or Solvency Ratio
Reserves to Capital Ratio
Capital Gearing Ratio
Proprietary Ratio
Accounting Ratios Formulas
Limitations of Ratios Analysis

 

 
 

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Financial Accounting Topics


  Introduction to Accounting
 ----------------------------------------------------------------------------
  Transactions and Accounting Equation
----------------------------------------------------------------------------
  Analysis of Business Transactions
----------------------------------------------------------------------------
  Journal, Ledger and Trial Balance
----------------------------------------------------------------------------
  Accounting for Bills of Exchange
----------------------------------------------------------------------------
  Special Journals
----------------------------------------------------------------------------
  Cash Book
----------------------------------------------------------------------------
Bank Reconciliation Statement
----------------------------------------------------------------------------
  Final Accounts
----------------------------------------------------------------------------
  Work Sheet
----------------------------------------------------------------------------
  Capital and Revenue Items
----------------------------------------------------------------------------
  Valuation of Inventories
----------------------------------------------------------------------------
  Accounts of Non-profit Making Organizations
----------------------------------------------------------------------------
  Statement of Cash Flows
----------------------------------------------------------------------------
  Accounting Ratios Analysis
----------------------------------------------------------------------------
  Depreciation, Provisions and Reserves
----------------------------------------------------------------------------
  Accounting Dictionary
----------------------------------------------------------------------------
  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
----------------------------------------------------------------------------
  Cost Volume Profit Relationship
----------------------------------------------------------------------------
  Variable Costing System
----------------------------------------------------------------------------
  Materials and Inventory Cost Control
----------------------------------------------------------------------------
  Activity Based Costing System
----------------------------------------------------------------------------
  Standard Costing and Variance Analysis
----------------------------------------------------------------------------
  Balanced Scorecard
----------------------------------------------------------------------------
  Capital Investment Analysis/Capital Budgeting
 
 

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