Proprietary Ratio, Meaning, Calculation, Examples
Get the proprietary ratio: its meaning, calculation, and real-world examples. Learn how this key financial metric evaluates a company's financial health accurately.
Shruti Dutta24 Jun, 2024
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The Proprietary Ratio, also known as the equity ratio, shareholder equity ratio, or net worth ratio, is a crucial solvency measure that provides insight into the financial structure of a business. This ratio assesses the extent to which shareholders or proprietors contribute to the total assets of a company. By determining the proportion of a business's total assets financed by its shareholders' equity, the Proprietary Ratio helps evaluate the stability and risk associated with the company's capital structure. A higher ratio indicates a stronger reliance on equity financing, which generally suggests a lower risk profile than reliance on debt. Understanding and calculating the Proprietary Ratio is essential for investors, financial analysts, and management as it reveals a business's financial health and sustainability, clearly showing how well the company can meet its long-term obligations and withstand financial challenges.
What is the Proprietary Ratio?
The Proprietary Ratio, also known as the equity ratio, shareholder equity ratio, or net worth ratio, is a key solvency measure that assesses the extent to which shareholders or proprietors contribute to a business's total assets. This ratio indicates the proportion of a business's total assets financed by its proprietors. It helps evaluate the stability of a company's capital structure and illustrates how its assets are funded primarily through equity shares rather than external loans or debt. Furthermore, the proprietary ratio provides insight into the potential payout to shareholders in case of liquidation. It is calculated as a percentage by dividing shareholder equity by total assets. Understanding the proprietary ratio is crucial for assessing financial health, capital structure stability, and the shareholder's stake in the business's assets. It serves as a valuable tool for both internal management and external stakeholders in making informed financial decisions.How to Calculate the Proprietary Ratio?
The Proprietary Ratio, also known as the equity ratio or shareholder equity ratio, is calculated to assess the proportion of a company's total assets that are financed by its shareholders or proprietors. Here's how you can calculate it:-
Identify the Components:
- Shareholder Equity: This includes the company's total equity or net worth, which can be found on the balance sheet under shareholders' equity or owner's equity.
- Total Assets: This represents the total resources owned by the company, including current and non-current assets, which are also listed on the balance sheet.
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Gather the Numbers:
- Locate the shareholder equity and total assets figures from the company's most recent balance sheet.
- Apply the Formula: The formula for calculating the Proprietary Ratio is: The formula for calculating the Proprietary Ratio is:
- Proprietary Ratio=(Shareholder Equity /Total Assets)×100Proprietary Ratio=( Total Assets/Shareholder Equity)×100
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Perform the Calculation:
- Divide the shareholder equity by total assets.
- Multiply the result by 100 to express the ratio as a percentage.
Proprietary Ratio Calculation Example
Suppose XYZ Corp has shareholders' funds of ₹400,000 and total assets of ₹700,000. What is the proprietary ratio? Solution: Shareholders' funds, also known as proprietors' funds, are the contributions made by the owners in a company or business. Using the formula: Proprietary Ratio=Total Assets/Proprietors’ Funds We have:- Proprietors' funds = ₹400,000
- Total assets = ₹700,000
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Proprietary Ratio FAQs
What is the proprietary ratio?
The proprietary ratio is a financial metric used to assess the proportion of total assets financed by the owner's equity or shareholders' funds. It indicates the extent to which a company relies on equity capital rather than debt financing.
What does the proprietary ratio indicate?
A high proprietary ratio (typically above 50%) suggests that a significant portion of a company's assets are financed through equity, indicating a strong financial position and lower dependency on external debt. Conversely, a lower ratio may indicate higher leverage and reliance on debt financing.
Can the proprietary ratio be negative?
No, the proprietary ratio cannot be negative. It is always expressed as a percentage and represents the proportion of assets financed by shareholders' equity relative to total assets.
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