Fixed Assets to Proprietor's Fund Ratio:
Definition:
Fixed assets to proprietor's fund ratio
establishes the relationship between fixed assets and shareholders funds.
The purpose of this ratio is to
indicate the percentage of the owner's funds invested in fixed assets. Formula:
Fixed Assets to Proprietors Fund = Fixed Assets / Proprietors Fund
The fixed assets are considered at their book value and the proprietor's funds
consist of the same items as internal equities in the case of
debt equity ratio.
Example:
Suppose the
depreciated book value of fixed assets is $ 36,000 and proprietor's funds are
48,000 the relevant ratio would be calculated as follows:
Fixed assets to proprietor's fund = 36,000 / 48,000
= 0.75 or 0.75 : 1
Significance:
The ratio of fixed assets to net worth
indicates the extent to which shareholder's funds are sunk into the fixed
assets. Generally, the purchase of fixed assets should be financed by
shareholder's equity including reserves, surpluses and retained earnings. If
the ratio is less than 100%, it implies that owners funds are more than fixed
assets and a part of the working capital is provide by the shareholders. When
the ratio is more than the 100%, it implies that owners funds are not
sufficient to finance the fixed assets and the firm has to depend upon
outsiders to finance the fixed assets. There is no rule of thumb to interpret
this ratio by 60 to 65 percent is considered to be a satisfactory ratio in
case of industrial undertakings. |
