Proprietary ratio is a test of the financial and credit strength of the business. It establishes relationship between proprietors to total assets. This ratio determines the long term solvency of the company. Alternatively this ratio is also known as Worth Debt Ratio. Net worth to Total Assets Ratio, Equity Ratio, Net worth Ratio or Assets Backing Ratio, Proprietor's funds to Total Assets Ratio or Share holders Funds to Total Assets Ratio. This ratio is expressed in percentage. This ratio is exercised to indicate the long term solvency of the business. This ratio shows general financial strength of the business. It determines the extent of trade on equity. It indicates long term solvency of business. It tests credit strength of business. It can be used to compare proprietary ratio with others firms or
industry.
Formula:
Proprietary ratio=(Proprietor' s Shareholder' s Fund/Total Assets)*100
Components:
1) Proprietors Funds = Paid up equity + Reserves and surplus less accumulated loss + Paid up preference capital
2) Total assets = Fixed assets + investment + current assets
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