From the following information, calculate 'Proprietary Ratio' and 'Debt-to-Equity Ratio':
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Solution and Explanation
1. Calculation of Proprietary Ratio
Formula:
Proprietary Ratio = Shareholders' Funds / Total Assets
Step 1: Calculation of Shareholders' Funds
| Particulars | Amount (₹) |
|---|---|
| Equity Share Capital | 3,00,000 |
| Preference Share Capital | 1,00,000 |
| Reserves and Surplus | 1,00,000 |
| Shareholders' Funds | 5,00,000 |
Step 2: Calculation of Total Assets
| Particulars | Amount (₹) |
|---|---|
| Plant and Machinery | 3,50,000 |
| Non-Current Investments | 1,00,000 |
| Current Assets | 2,00,000 |
| Total Assets | 6,50,000 |
Step 3: Calculation
Proprietary Ratio = 5,00,000 / 6,50,000
Proprietary Ratio = 0.77 : 1 (approximately)
2. Calculation of Debt-to-Equity Ratio
Formula:
Debt-to-Equity Ratio = Long Term Debts / Shareholders' Funds
Step 1: Long Term Debts
| Particulars | Amount (₹) |
|---|---|
| Long-term Borrowings | 1,50,000 |
| Long Term Debts | 1,50,000 |
Step 2: Shareholders' Funds
Shareholders' Funds = ₹ 5,00,000
Step 3: Calculation
Debt-to-Equity Ratio = 1,50,000 / 5,00,000
Debt-to-Equity Ratio = 0.30 : 1
Results
| Ratio | Value |
|---|---|
| Proprietary Ratio | 0.77 : 1 |
| Debt-to-Equity Ratio | 0.30 : 1 |
Working Notes
- Shareholders' Funds = 3,00,000 + 1,00,000 + 1,00,000 = ₹ 5,00,000
- Total Assets = 3,50,000 + 1,00,000 + 2,00,000 = ₹ 6,50,000
- Long Term Debts = ₹ 1,50,000
Interpretation
A Proprietary Ratio of 0.77 : 1 indicates that 77% of total assets are financed by shareholders’ funds.
A Debt-to-Equity Ratio of 0.30 : 1 shows that for every ₹1 of shareholders’ funds, the company has ₹0.30 of long-term debt. This reflects low financial leverage and a strong equity position.
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