Proprietary Ratio is a type of Solvency Ratio that determines the relative contribution of Proprietor/Shareholder in a company’s Total Capital. Shareholders Contribution is termed as Equity. The proprietary Ratio is also known as the Net Worth Ratio or Equity Ratio.
$$Proprietary\quad Ratio=\frac { Total\quad Equity }{ Total\quad Capital } $$ Total Equity = Total Assets - Total Liability;
total assets and total liability include current as well as non-current assets and liabilities, respectively. It also includes Reserves and Surplus of the company.Where,
$$Proprietary\quad Ratio=\frac { Total\quad Equity }{ Total\quad Capital } $$ Total Equity = Total Assets - Total Liability;
total assets and total liability include current as well as non-current assets and liabilities, respectively. It also includes Reserves and Surplus of the company.Where,
- And Total Capital = Total Equity + Total Debt; total capital implies shareholders as well as creditors contribution.
Significance and Interpretation
- Proprietary Ratio =
- For, Proprietary Ratio = 1, Total Debt must be Zero, and Debt cannot be less than zero.
- Hence, the Maximum Value of Proprietary Ratio = 1
- Proprietary Ratio = 0.5: This implies that the Total Equity of a company is half of the total assets owned or in other words Total Debt = Total Equity.
- Proprietary Ratio < 0.5: This implies that Equities contribute less than 50% in the company’s total assets or in other words Total Debt exceeds total equity of a company, the company faces lots of issues in times when the interest rates rise.
- Proprietary Ratio > 0.5: This implies that equities dominate in the company’s total capital and they constitute more than 50% of the total capital.
- The ideal Proprietary Ratio > 0.5, which indicates that the company has more than half of the capital as equity. However, it must be noted that this limit may shift depending upon the regulatory reforms and/or type of business.
- A high Proprietary Ratio is beneficial for lenders to the company, wherein a low Proprietary Ratio is beneficial to the company for trading in Equities.
Examples
Example 1:
M/S ABC Ltd. reported total debts worth ₹380 Crores and total equity as ₹620 Crores, find the proprietary ratio of M/S ABC Ltd
Solution:
Total Equity = ₹620 Crore; Total Debt = ₹380 Crore
Total Capital = Total Debt + Total Equity
Total Capital = Total Debt + Total Equity
⇨ (380 + 620)
⇨ ₹1000 Crore
Hence, Proprietary Ratio = Total Equity / Total Capital
Hence, Proprietary Ratio = Total Equity / Total Capital
⇨ 620/1000
⇨ 31/50 or 0.62
Example 2:
The following information is available about M/S XYZ Ltd, find a proprietary ratio of the firm.| Sr. No | Particulars | Amount (in ₹ Cr) |
|---|---|---|
| 1 | Current Liability | 440.00 |
| 2 | Non-Current liability | 50.00 |
| 3 | Share Capital | 150.00 |
| 4 | Money Reserved Against Share Warrants | 80.00 |
| 5 | Reserves and Surplus | 500.00 |
Solution:
Total Equity = Share Capital + Money Reserved Against Share Warrants + Reserves and Surplus
⇨ ₹730 Crore
Total Debt = Current Liability + Non- Current Liability
Total Debt = Current Liability + Non- Current Liability
⇨ ₹490Crore
Total Capital = Total Debt + Total Equity
Total Capital = Total Debt + Total Equity
⇨ ₹1220 Crore
Proprietary Ratio = Total Equity/ Total Capital
Proprietary Ratio = Total Equity/ Total Capital
⇨ 730/1220
⇨73/122
Hence, Proprietary Ratio = 73/122 or 0.56
Hence, Proprietary Ratio = 73/122 or 0.56
