What is Proprietary Ratio? What are its components? What does it indicate?
Proprietary Ratio also known as equity ratio indicates the relationship between the owners’ funds and total assets. It basically indicates the extent to which owners funds are invested in different types of assets. It basically shows the general financial strength of the company. It also tests the soundness of the capital structure. Higher the ratio better is the long term solvency position of the company. If owners’ funds are more than the fixed assets, it means that a part of owners’ funds is invested in the current assets also. A lower ratio indicates greater risk to the creditors. If the owners’ funds are less than fixed assets, then that means a part of fixed assets is financed by the creditors either long term or short term.
Its components are: Shareholder’s funds and Total assets. Shareholder’s funds include equity share capital, all reserves and surpluses. Total assets include all assets, including goodwill.
Formula to calculate Proprietary Ratio = Total Assets/ Owners' Fund