Fixed Assets To Proprietor's Fund Ratio: Definition & Interpretation



What is Fixed Assets to Proprietor's Fund Ratio?
The fixed assets to Proprietor's fund ratio represents the relationship between fixed assets and equity funds.
         It is also called as fixed assets to net worth or equity fund ratio that indicates how much percentage owner's or equity's funds invested in fixed assets.

Fixed Assets to Proprietor's Fund Ratio Formula:
The formula is given below,
        Fixed assets to Proprietor's fund= Fixed assets/Proprietor's Fund

Fixed assets are considered as their book value and the Proprietor's fund includes share capital, preference share, reserve and surplus.

Fixed Assets to Proprietor's Fund Ratio Example:

                 

Let, it is ABC company. Here is some information about the ABC company.

Balance sheet of ABC company as on 31.03.2019

                   

        Therefore, Fixed assets to Proprietor's fund Ratio =(815000/930000)=0.87 or 87%

It means, 87% of fixed assets of the company are financed by proprietors' funds.

Fixed Assets to Proprietor's Fund Ratio Significance or Interpretation:
Fixed assets to proprietor's fund Ratio that measures the long term financial stability and solvency position of the company. Basically, the fixed assets should be purchased by the equity funds.
         A lower or less than 100% Fixed assets to Proprietor's fund ratio reveals that the use of more share capital for financing fixed assets. So, a company maintains conservative approach and also indicates sond debt obligations repayment capacity. 
         A higher or more than 100% fixed assets to proprietor's fund ratio indicates that equity's capital is less than the fixed assets and a company purchased fixed assets by debt financing, that would be harmful for the shareholders.
         There is no ideal ratio but 65% is considered to be satisfactory ratio for most of the industrial undertakings. And it very from industry to industry.

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