Question

From the following information, calculate 'Proprietary Ratio' and 'Debt-to-Equity Ratio':

Hint:

Proprietary Ratio = Shareholders' Funds / Total Assets. Debt-to-Equity Ratio = Long Term Debts / Shareholders' Funds. Higher proprietary ratio means lower dependence on external funds.

Answer 1

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)

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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

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Results

Ratio	Value
Proprietary Ratio	0.77 : 1
Debt-to-Equity Ratio	0.30 : 1

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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.