Financial Ratio: Proprietary Ratio

June 10th, 2006 Comments off
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The Proprietary Ratio represents the proportion of Proprietors’ Equity to Total Assets.

 

PROPRIETARY RATIO:

FORMULA

Shareholders’ Equity/Total Assets ( Current Assets+ Fixed Assets)

MEASURE WHAT

A test of Credit Strength. Is also a test of capitalization and a high or low ratio may indicate low or high earnings respectively per share.

SCORE/VALUE

A higher percentage denotes the stronger the financial position of the enterprise

SALIENT POINTS TO NOTE

 

1.  The higher this Proprietary ratio denotes that the shareholders have provided the funds to purchase the assets of the concern instead of relying on other sources of funds like bank borrowings, trade creditors and others

 

2.   However, too high a proprietary ratio say 100%  means that management has not effectively utilize cheaper sources of finance like trade and long term creditors. As these sources of funds are cheaper, the inability to make use of it might lead to lower earnings and hence a lower rate of dividend payout.

 

3.   This ratio is a test of credit strength as too low a proprietary ratio would mean that the enterprise is relying a lot more on its creditors to supply its working capital.

 

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Financial Accounting

 
 

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