Proprietary Ratio or Equity Ratio


Proprietary Ratio or Equity Ratio:

Definition:

This is a variant of the debt-to-equity 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 long-term 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 orĀ  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 long-term 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:

  1. Ratio of fixed assets to shareholders/proprietors’ funds
  2. Ratio of current assets to shareholders/proprietors’ funds

 

You may also be interested in other articles from “financial statement analysis” chapter:

  1. Horizontal and Vertical Analysis
  2. Ratios Analysis
  3. Horizontal Analysis or Trend Analysis
  4. Trend Percentage
  5. Vertical Analysis
  6. Accounting Ratios Definition, Advantages, Classification and Limitations:
  7. Gross profit ratio
  8. Net profit ratio
  9. Operating ratio
  10. Expense ratio
  11. Return on shareholders investment or net worth
  12. Return on equity capital
  13. Return on capital employed (ROCE) Ratio
  14. Dividend yield ratio
  15. Dividend payout ratio
  16. Earnings Per Share (EPS) Ratio
  17. Price earning ratio
  18. Current ratio
  19. Liquid/Acid test/Quick ratio
  20. Inventory/Stock turnover ratio
  21. Debtors/Receivables turnover ratio
  22. Average collection period
  23. Creditors/Payable turnover ratio
  24. Working capital turnover ratio
  25. Fixed assets turnover ratio
  26. Over and under trading
  27. Debt-to-equity ratio
  28. Proprietary or Equity ratio
  29. Ratio of fixed assets to shareholders funds
  30. Ratio of current assets to shareholders funds
  31. Interest coverage ratio
  32. Capital gearing ratio
  33. Over and under capitalization
  34. Financial-Accounting- Ratios Formulas
  35. Limitations of Financial Statement Analysis

Other Related Accounting Articles:

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