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 Ratio = Total Equity / Total Capital

**Where,****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.**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 = (380 + 620) = ₹1000 Crore
**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 = ₹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**