Definition
The Proprietary Ratio, also known as the equity ratio, is a financial metric that indicates the proportion of a company’s total assets that are financed or owned by the owners or shareholders. It is calculated by dividing the total shareholders’ equity by the total assets of the company. It is used to assess financial stability, with a higher ratio indicating a stronger financial position.
Key Takeaways
- Proprietary Ratio, also known as the Equity Ratio, is a financial metric that is used to evaluate a company’s financial structure. It demonstrates the proportion of shareholders’ funds to the total tangible assets of the company, providing a rough idea of the financial stability and solvency position of a company.
- The formula for the proprietary ratio is: Proprietary Ratio = Shareholder’s Funds / Total Tangible Assets. This ratio can be a great tool for investors as it aids them in determining how much of the company’s assets are financed by shareholders’ funds and if the company will be able to handle its obligations in the long run.
- A higher proprietary ratio is typically preferred as it indicates that the company is largely financed by shareholders and has less debt. Conversely, a lower ratio indicates higher debt, which could imply greater financial risk to stakeholders in the event the company cannot fulfill its liabilities.
Importance
The Proprietary Ratio, also known as the Equity Ratio, is a crucial financial indicator as it helps assess a company’s financial stability or health.
This ratio displays the proportion of total assets funded by the owner’s capital, providing insights into the company’s solvency and risk level.
If the ratio is high, it usually indicates that the company is more solvent, has a lower risk level, and is hence, more attractive to investors or creditors.
It’s an excellent tool for comparing different companies within the same industry, viewing their financial structures, and evaluating their capability to survive in adverse economic scenarios.
Therefore, the proprietary ratio is a significant measure in finance for decision making and future investment planning.
Explanation
The proprietary ratio, also known as the equity ratio, holds significant value in understanding the financial health of an organization. Its purpose is to provide a clear picture of the financial stability of a company by showing the relationship between a company’s shareholders’ equity and its total assets. This ratio methodically analyses the capital structure of the company, revealing the proportion funded by shareholders against the total resources of the company.
It empowers shareholders, creditors, and potential investors to assess the financial capability of a company to meet its long-term liabilities, revealing how much of the total funds are internal. In essence, the proprietary ratio is used as a tool to measure a company’s financial solidity and risk by providing vital data on its overall indebtedness, financial resilience, and its capacity to withstand economic downturns. The higher the proprietary ratio, the lower the financial risk.
A high proprietary ratio indicates that a large part of the assets are financed by owners and contributes to the company’s sustainability. However, it may also reflect a lack of leveraging benefits. On the contrary, a lower ratio may signify higher financial risk as it indicates greater reliance on external liabilities.
Therefore, maintaining a balanced proprietary ratio is crucial for any business.
Examples of Proprietary Ratio
Proprietary ratio, also known as the equity ratio, is a financial metric used by investors and analysts that indicates the proportion of a company’s total assets which are financed or owned by the shareholders. Here are three real-world examples:Apple Inc.: As of Q1 2022, Apple Inc. had a total shareholder equity (surplus of assets over liabilities) of $00 billion and total assets stood at roughly $69 billion. This would give a proprietary ratio of approximately
34, indicating 34% is financed by investors while the rest is financed through debts or liabilities.Microsoft Corporation: As of Q1 2022, Microsoft had $09 billion shareholder equity with total assets of $51 billion. The proprietary ratio would stand at
43, showcasing that the company has a good proportion of its assets financed by the shareholders.Amazon Inc.: As per Q4 2021, Amazon reported total shareholder equity of around $48 billion, with total assets amounting to $2 billion. This results in a proprietary ratio of approximately
32, suggesting about 32% of the company’s total assets are financed by the owners/shareholders.In all these examples, the ratio shows the proportion of assets that are owned by shareholders as opposed to being financed through debt. The higher this ratio, the more financial stability a company is considered to have.Please note that these figures are subject to change as companies release new financial data. Actual figures should be confirmed from the latest financial statements of the respective companies.
FAQs about Proprietary Ratio
1. What is a Proprietary Ratio?
A Proprietary Ratio, also known as an equity ratio, is a financial metric used by investors and analysts to understand the financial leverage of a company. It compares the shareholder’s equity to the total assets of the company, essentially showing the proportion of a company’s assets financed by stockholders and not creditors.
2. How is Proprietary Ratio calculated?
Proprietary Ratio is calculated using the following formula: Proprietary Ratio = Shareholder’s Equity / Total Assets. All values needed for the calculation can be found in a company’s balance sheet.
3. What does the Proprietary Ratio indicate?
The Proprietary Ratio reflects the extent to which a company is dependent on its own resources to fund its assets. A higher ratio indicates less risk for creditors as more assets are financed by the owners, while a lower ratio may suggest that the company relies more on borrowed funds.
4. What is considered a good Proprietary Ratio?
A higher Proprietary Ratio, close to 1 or 100%, is generally considered good as it signifies that a larger proportion of the company’s assets are backed by the shareholder’s equity. However, a suitable ratio can vary depending on the industry and individual company circumstances.
5. How does Proprietary Ratio differ from Debt Ratio?
Although similar, Proprietary Ratio and Debt Ratio focus on different aspects. Proprietary Ratio shows to what degree a company is financed by shareholders, while Debt Ratio shows the proportion of a company’s assets that are financed by creditors.
Related Entrepreneurship Terms
- Equity Capital
- Debt Ratio
- Shareholder’s Funds
- Fixed Assets
- Total Assets
Sources for More Information
- Investopedia: This online resource provides a wide array of financial and investment information. You can find specific pieces about proprietary ratios and more.
- Accounting Tools: A comprehensive source for all things accounting and finance, includes articles and tutorials about various financial ratios, including the Proprietary Ratio.
- Corporate Finance Institute (CFI): Offers courses and free resources on a variety of finance topics including financial analysis and ratios like the Proprietary Ratio.
- My Accounting Course: An online accounting course with a comprehensive glossary and lessons that include financial ratios like the Proprietary Ratio.
