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CA Intermediate · Financial Management and Strategic Management · Financial Analysis and Planning - Ratio Analysis

Which of the following statements about the proprietary ratio is correct?

The proprietary ratio is shareholders' funds divided by total assets, and a higher value signals stronger long-term financial safety because owners finance more of the assets. The other formulas describe the debt-equity ratio, current ratio and return on capital employed respectively.

  1. AIt is computed as total debt divided by shareholders' funds
  2. BIt is computed as shareholders' funds divided by total assets, and a higher ratio indicates greater long-term financial safetyCorrect
  3. CIt is computed as current assets divided by current liabilities
  4. DIt is computed as PBIT divided by capital employed

Explanation

Proprietary ratio = Shareholders' funds / Total assets (or total capital). A higher ratio means more of the assets are financed by owners, which gives creditors greater safety. Option A describes a debt-equity ratio, C the current ratio and D return on capital employed.

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