What Is Proprietary Ratio and How Does It Reveal a Company’s Real Strength

There are dozens of financial ratios, but many traders and investors give priority to the proprietary ratio when making important decisions. This is because it shows how much of a company’s assets are funded by shareholders’ equity. In other words, it signals the company’s long-term financial health and stability. Let’s today understand what is proprietary ratio in detail and the proprietary ratio formula with an example!

What is Proprietary Ratio?

The proprietary ratio is an important financial ratio. It shows how much of a company’s assets are backed by its own shareholders’ funds instead of borrowed money. 

The meaning of proprietary ratio is simple. It tells us whether a business stands on the strength of its equity. or, is it leaning too heavily on outside debt? 

It is used to measure the proportion of total assets financed by shareholders’ funds and is sometimes called the equity ratio

The higher the proprietary ratio, the more financially stable the company is considered in the long run, because it means the owners themselves are carrying the weight rather than creditors.

Proprietary Ratio Calculation and Formula

The proprietary ratio is a direct measure of solvency and long-term financial health.

Proprietary Ratio Formula

Proprietary Ratio = Proprietors’ Funds/ Total Assets

This ratio can also be expressed as a percentage by multiplying the result by 100.

Components

1. Proprietors’ Funds (Shareholders’ Equity)

These are the funds that truly belong to the owners of the business. 

They are calculated as:

Proprietors’ Funds =  Equity Share Capital + Preference Share Capital + Reserves and Surplus – Fictitious Assets

• Equity Share Capital: This is the money raised by issuing equity shares.
• Preference Share Capital: These are the funds from issuing preference shares.
• Reserves and Surplus: This fund represents the accumulated profits that have not yet been distributed.
• Fictitious Assets: These could include preliminary expenses, accumulated losses, or any item shown as an asset but without real value. These are deducted.

2. Total Assets

This includes all assets, current and non-current, owned by the company.

Total Assets =  Non-current Assets + Current Assets

It can also be derived from the accounting equation:

Total Assets= Proprietors’ Funds + Non-current Liabilities + Current Liabilities

• A high proprietary ratio = greater ownership stake, financial independence, lower risk.
• A low proprietary ratio = more reliance on debt, higher financial risk.

Proprietary Ratio Formula with Example

Let’s see how it works with a practical calculation.

Example 1: Company XY

• Proprietors’ Funds: ₹60,00,000
• Total Assets: ₹90,00,000

Proprietary Ratio = ₹60,00,000 ÷ ₹90,00,000 = 0.67 (67%)

Interpretation:

Company X has 67% of its assets financed by equity. This shows a strong and stable financial structure, with limited dependence on debt and high reliance on shareholders’ funds.

Example 2: Company YZ

• Proprietors’ Funds: ₹25,00,000
• Total Assets: ₹1,00,00,000

Proprietary Ratio = ₹25,00,000 ÷ ₹1,00,00,000 = 0.25 (25%)

Interpretation:

Company Y has only 25% of its assets funded by equity. This signals a heavier dependence on borrowings. This makes the company more vulnerable to financial risks.

What Does the Proprietary Ratio Indicate?

The proprietary ratio provides insights into the financial foundation of a company.

High Ratio

A ratio of 0.5 (50%) or above is generally seen as favourable. It indicates that at least half of the company’s assets are financed by equity, reflecting solvency, financial independence, and reduced risk of insolvency. 

However, an excessively high ratio may also indicate that the company is underutilising debt financing, which could hinder growth.

Low Ratio

A ratio below 0.5 (50%) indicates greater reliance on debt, raising concerns about financial stability. Companies with low proprietary ratios often face higher borrowing costs and reduced confidence from investors or creditors.

A healthy proprietary ratio builds trust with lenders and investors, showing the company’s ability to survive downturns without excessive borrowing. A weak ratio, on the other hand, can create hesitation and highlight financial fragility.

Advantages of the Proprietary Ratio

Here are multiple benefits of using this ratio-

• It is simple to calculate and interpret.
• It reveals long-term solvency at a glance.
• The proprietary ratio is useful for lenders, investors, and management
• You can compare the financial strength between companies.

Limitations of the Proprietary Ratio

While powerful, it is not perfect.

• It doesn’t show short-term liquidity.
• It can be misleading if asset valuations are inflated.
• This financial ratio ignores profitability (a company may have high ownership but still be unprofitable).
• Different industries have distinct norms, making cross-industry comparisons less meaningful.

Importance of Proprietary Ratio

The importance of the proprietary ratio lies in its ability to help multiple stakeholders at once:

• For Management: It helps in capital structuring and future planning.
• For Investors: It indicates financial independence and lower risk.
• For Creditors: This ratio inspires confidence in the company’s repayment capacity.
• For Analysts: The Proprietary ratio provides an easy solvency measure for comparison.

In short, it is one of the simplest yet most powerful solvency ratios in finance.

Want to understand how different asset classes impact financial ratios?

Check out our detailed guide on the types of investments to explore smarter options for building wealth.

Final Thoughts

The proprietary ratio tells us whether a company stands on the firm ground of owner’s funds or leans heavily on external support. The takeaway is simple: a healthy proprietary ratio means stability, trust, and confidence. 

While no single ratio can define a company’s fate, this one remains an essential part of financial analysis. For investors, it is a quick yet powerful lens into how safely their capital is being protected.

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Proprietary Ratio Meaning- FAQs