The proprietary ratio evaluates a company's financial stability by assessing the percentage of its total assets financed by proprietors' or shareholders' funds. The calculation formula is Proprietary Ratio = Proprietors' Funds or Shareholders' Equity / Total Assets.
Learn the proprietary ratio, its formula, and calculation steps. Master this key solvency ratio for Commerce exams with examples.
Let’s today understand what is proprietary ratio in detail and the proprietary ratio formula with an example! What is Proprietary Ratio? The proprietary ratio is an important financial ratio. It shows how much of a company’s assets are backed by its own shareholders’ funds instead of borrowed money. The meaning of proprietary ratio is simple.
Proprietary ratio = 0.73. A proprietary ratio of 0.73 shows that the company has 0.73 units of shareholders’ funds for each unit of total assets or in other words, 73% of the total assets of the company are financed by proprietors’ funds.
The proprietary ratio (also known as net worth ratio or equity ratio) is used to evaluate the soundness of the capital structure of a company. It is computed by dividing the stockholders’ equity by total assets.
Proprietary ratio is the one that is used to express a relationship between the amount invested by proprietors in the business and the total assets owned by the business.
Shareholders' equity ÷ Total tangible assets = Proprietary ratio. If the proprietary ratio is high, this indicates that a company has a sufficient amount of equity to support the functions of the business, and probably has room in its financial structure to take on additional debt, if necessary.