Proprietary Ratio Formula & Example

Definition: Proprietary Ratio (also known as Equity Ratio or the Net Worth to Total Assets Ratio) is the proportion of shareholders' funds to total assets. A high ratio will indicate that the firm has sufficient amount of equity to support the functions of the business.

Formula:
Proprietary Ratio = Shareholders funds / Total Assets
Or,
Proprietary Ratio = Shareholders' equity / Total tangible assets

(Note: Shareholder's funds include equity share capital and all reserves)

Example 1:
CC Ltd has total shareholders funds of $2,200,000 and the total assets are $2,750,000. Then:
Equity Ratio = 2,200,000 / 2,750,000 = 0.8
This means that shareholders contribute 80 cents for every $1 employed in the business, with creditors contributing the remaining 20 cents.

Example 2:
MPA plc has shareholders' equity of $900,000 and total assets of $1,200,000 (including goodwill $200,000). Then:
Total tangible assets = 1,200,000 - 200,000 = $1,000,000
Proprietary ratio = 900,000 / 1,000,000 = 0.9

* Next: Financial Leverage Ratio Analysis
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