Proprietary Ratio
Chapter Thirty
Syllabus topic 2, "Balance Sheet Ratios : i) Current Ratio ii) Liquid Ratio iii) Stock Working Capital Ratio iv) Proprietary Ratio v) Debt Equity Ratio vi) Capital Gearing Ratio"
Pages 80 to 81 of 162
In one line
The proprietary ratio is the proportion of the total assets that has been financed by the owners.
The formula
Proprietary ratio = (Proprietors' funds / Total assets) x 100
Expressed as a percentage, or as "x to 1". There is no statutory standard; a figure above 50 per cent is generally regarded as sound and the appropriate level differs by industry.
The numerator
Proprietors' funds = Equity share capital + Preference share capital + Reserves and surplus, less fictitious assets
Preference capital is included. MU says so herself in the Module III topic on the return on proprietor's fund, where her bracket reads "Shareholders Fund and Preference Capital".
Fictitious assets are deducted: preliminary expenses not written off, discount on issue of shares or debentures, and any debit balance in the profit and loss account.
The denominator
Total assets = All the assets, less fictitious assets
Include the current assets. Include investments. Exclude fictitious assets, because they were deducted from the numerator and leaving them in the denominator would count them once.
Some books exclude intangible assets as well. Goodwill, patents and trade marks are real assets with real value, and MU's questions carry them in. Include them unless the question tells you to exclude them, and say what you did.
Worked on Sunrise
| 2026, Rs | 2027, Rs | |
|---|---|---|
| Equity share capital | 10,00,000 | 10,00,000 |
| Preference share capital | 2,00,000 | 2,00,000 |
| Reserves and surplus | 1,40,000 | 3,00,000 |
| Proprietors' funds | 13,40,000 | 15,00,000 |
| 2026, Rs | 2027, Rs | |
|---|---|---|
| Fixed assets | 13,00,000 | 14,00,000 |
| Investments | 1,00,000 | 1,00,000 |
| Current assets | 5,90,000 | 7,60,000 |
| Total assets | 19,90,000 | 22,60,000 |
| 2026 | 2027 | |
|---|---|---|
| Proprietary ratio | 67.34 per cent | 66.37 per cent |
Specimen working: Rs 15,00,000 over Rs 22,60,000 times 100 is 66.37 per cent.
Interpretation
Two thirds of Sunrise's assets are financed by its owners. That is well above 50 per cent, so the business is soundly financed and a creditor has a large cushion: the assets could lose a third of their value before the outsiders' claims were at risk.
The ratio fell slightly, from 67.34 to 66.37. The fall is not a weakening of the owners' position in rupees, since proprietors' funds rose Rs 1,60,000. It is because the total assets grew faster than the owners' funds, the difference having been financed by the rise in current liabilities.
Say that carefully. A falling proprietary ratio with rising proprietors' funds means the business grew partly on other people's money, which is a different finding from the owners withdrawing.
What the level means
| Proprietary ratio | Usually means |
|---|---|
| High, say above 70 per cent | Very safe for creditors; but the company may be under-using the cheap finance that borrowing offers |
| Around 50 to 70 per cent | Sound |
| Below 50 per cent | More than half the assets are financed by outsiders; the creditors' cushion is thin and the company is exposed if trading turns down |
The rest of this chapter
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The rest of this subject
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