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 |
