Proprietary Ratio is a

$$Proprietary\quad Ratio=\frac { Total\quad Equity }{ Total\quad Capital } $$

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.

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**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,****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

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**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**

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**Solution:**

**Total Equity =**₹620 Crore;

**Total Debt =**₹380 Crore

**Total Capital =**Total Debt + Total Equity

**⇨**(380 + 620)

**⇨**₹1000 Crore

**Hence, Proprietary Ratio = Total Equity / Total Capital**

**⇨**

**620/1000**

**⇨**31/50 or 0.62

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**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 |

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**Solution:**

**Total Equity =**Share Capital + Money Reserved Against Share Warrants + Reserves and Surplus

**⇨**₹730 Crore

**Total Debt =**Current Liability + Non- Current Liability

**⇨**₹490Crore

**Total Capital =**Total Debt + Total Equity

**⇨**₹1220 Crore

**Proprietary Ratio =**Total Equity/ Total Capital

**⇨**730/1220

**⇨**73/122

**Hence, Proprietary Ratio = 73/122 or 0.56**