Are you curious to know what is proprietary ratio? You have come to the right place as I am going to tell you everything about proprietary ratio in a very simple explanation. Without further discussion let’s begin to know what is proprietary ratio?
What Is Proprietary Ratio?
Proprietary ratio is a financial ratio that measures the proportion of assets that are financed through equity as opposed to debt. It is also known as equity ratio or net worth ratio. The proprietary ratio is an important measure of a company’s financial stability and long-term sustainability.
The formula for calculating proprietary ratio is:
Proprietary Ratio = Shareholders’ Funds / Total Assets
Where Shareholders’ Funds include equity share capital, preference share capital, reserves and surplus, and other non-current liabilities.
Total Assets include all current and non-current assets owned by the company.=
A higher proprietary ratio indicates that a company is relying more on equity to finance its assets, which is generally considered a positive sign. A lower proprietary ratio indicates that a company is relying more on debt to finance its assets, which can be risky in the long run.
Interpreting Proprietary Ratio
The proprietary ratio is an important indicator of a company’s financial stability and risk profile. A high proprietary ratio indicates that a company has a strong equity base and is less reliant on debt financing, which reduces the risk of financial distress. A low proprietary ratio, on the other hand, indicates that a company is highly leveraged and is vulnerable to financial distress.
In general, a proprietary ratio of 0.5 or higher is considered healthy, while a ratio below 0.5 indicates that a company is relying heavily on debt to finance its operations.
Limitations Of Proprietary Ratio
While the proprietary ratio is a useful tool for analyzing a company’s financial stability, it has certain limitations that must be considered:
- Industry Variation: The proprietary ratio varies across industries and may not be directly comparable between companies in different sectors.
- Lack of Debt Information: The proprietary ratio does not provide information about the company’s debt level or debt service capacity.
- Use of Non-Current Liabilities: The inclusion of non-current liabilities in the calculation of the ratio may distort the results, as non-current liabilities may not be readily available to fund current operations.
Conclusion
The proprietary ratio is a useful tool for analyzing a company’s financial stability and long-term sustainability. A higher proprietary ratio indicates that a company is relying more on equity to finance its operations, which reduces the risk of financial distress. While the proprietary ratio has certain limitations, it remains a valuable tool for investors and analysts to evaluate a company’s financial health.
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FAQ
What Is The Formula Of The Proprietary Ratio?
Proprietary Ratio Formula = Proprietors’ Fund / Total Assets
Total assets refer to all company-owned assets, including fixed assets, current assets, investments, and other assets.
What Is The Proprietary Ratio Ideal Ratio Class 12?
Generally, the ratio of 2 : 1 is considered as an ideal. Items Included in Long-term Debts It includes long-term borrowings and long-term provisions. (ii) Proprietary ratio It establishes the relationship between proprietors’ funds and total assets.
Is Proprietary Ratio Short-Term?
The proprietary ratio is calculated by dividing proprietors’ funds by total assets. Proprietors’ funds include share capital, reserves, and surpluses as per the balance sheet. Total assets include long-term assets & short-term assets include goodwill etc as per the balance sheet.
What Is The 100 Proprietary Ratio?
Formula of Proprietary Ratio
If this ratio is 100%. It means the whole money which was invested in the total assets, is of shareholders’ invested capital. It this Ratio is just 10%, it means, the company has just taken 10% of total purchased assets from shareholders. Other 90% money is from debt.
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