The proprietary ratio (also referred to as net worth percentage or equity ratio) is needed to evaluate the soundness in the capital structure of any company. It will be computed by splitting up the stockholders value by total possessions.
Formula
Some analysts prefer to exclude intangible assets (goodwill etc.) from the denominator of the above formula. In that case, the formula would be written as follows:
The information about stockholders’ equity and assets is available from balance sheet.
Example
The proprietary ratio is 55%. It means stockholders’ has contributed 55% of the total tangible assets. The remaining 45% have been contributed by creditors.
Significance and interpretation:
Proprietary ratio indicates the contribution of stockholders’ in one payemnt capital of the company. A high amazing ratio, therefore, indicates a robust financial position of the company and higher security for loan companies. A low ratio indicates which the company is already heavily based on debts for its operations. A large area of debts in the overall capital may minimize creditors interest, increase interest expenses along with the risk of a bankruptcy proceeding.
