Proprietary Ratio, Meaning, Calculation, Examples

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?

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How to Calculate the Proprietary Ratio?

1. 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.
2. Gather the Numbers:
   • Locate the shareholder equity and total assets figures from the company's most recent balance sheet.
3. Apply the Formula: The formula for calculating the Proprietary Ratio is: The formula for calculating the Proprietary Ratio is:
4. Proprietary Ratio=(Shareholder Equity /Total Assets)×100Proprietary Ratio=( Total Assets/Shareholder Equity​)×100
5. 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

• Proprietors' funds = ₹400,000
• Total assets = ₹700,000