A ratio that relates tangible net worth to total tangible assets. It reflects the extent to which tangible assets are financed by owners’ equity, that is the degree to which an entity depends on tangible assets such as inventory items, buildings, manufacturing equipment or machinery, and office furniture (generally, PPE).
Proprietary ratio = tangible net worth/ total tangible assets
Proprietary ratio is a type of solvency ratio that determines the amount or contribution of shareholders (i.e., proprietors or owners) towards the total assets (usually total tangible assets) of an entity.
It may also be calculated for total equity:
Proprietary ratio = total equity/ total tangible assets
The proprietary ratio may also express the relationship between proprietor’s funds, i.e., shareholder’s funds, and net assets or capital employed. In its multiple forms, properietary ratio is an indicator about the soundness of the capital structure (solvency) of an entity. The higher the ratio, the lower an entity’s dependence on external sources of funds and the more stable the position of the entity is in the long run, and vice versa.
It is also known as equity ratio or net worth ratio or shareholder equity ratio.
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