Proprietary Ratio Super Simplified Formula & Interpretation

Proprietary Ratio = Total Equity/ Total Tangible Assets

Formula for Proprietary Ratio

If you were just looking for the formula, then you don’t need to read any further.

Instead, if you are looking for some deeper insights and also want to know why you never heard of this formula then read on.

Contents

Interpretation of Proprietary Ratio

If you look at this simply straight then, we are saying this:


“What proportion of tangible assets belong to the shareholders”

Now, you may ask why does that matter? Well, it doesn’t and that’s why the limited use.

However, if you want to look at the solvency of a particular company, then this might be a fancy way.

Look at the balance sheet below of Tata Steel;

Tata Steel

So, If we calculate then we get:

  • The proprietary ratio for this company then it comes as (Share capital + Reserves)/ Fixed assets. Which comes out to be=1.0079.

But wait! What does that even mean? i.e 1.0079?

So, numerically all it means, is that shareholders’ equity is almost equivalent to fixed assets.

Reliance Industries

So if we calculate the same ratio for reliance industries we get, 1.24.

Now, I will summarise the findings! Which, if you see that Reliance has lower debt compared to tata steel, but has a higher prop ratio.

So, that means lower debt leads to a higher proprietary ratio! Which makes total sense, after all, it is a proprietary ratio, right?

Why analysts don’t use it?

For the same reason, what we experienced.

I mean why would you entangle your hands from behind your nose to catch the same nose?

Firstly the debt to equity gives almost the same information as this ratio. Then why look for the same information again?

Similar Ratios like this

There are multiple such behind-the-nose ratios, which you could use to infer almost the same information.

  • Leverage Ratio: Assets / Equity, which is the reverse of the prop ratio. The higher this ratio the more leverage you have.
  • Debt to total capital: Debt/ (Equity+Debt), which is to find the proportion of debt to the total capital employed
  • Debt to Equity: Debt/Equity, which is how many times debt is compared to equity.

Moreover, all the above ratios, infer the same information.

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ALLEN ARAVINDAN,CFA

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