abhishreshthaa
Abhijeet S
Proprietor’s funds (also called net worth) include all share capital (equity and preference), reserves and surplus less: accumulated losses and fictitious assets. Total assets include all fixed assets, investments and current assets.
Significance:
1. This ratio is a measure of long term solvency
2. It shows the extent of the proprietor’s interest in the business and protection available to long term creditors.
3. It also indicates the method of financing and ‘trading on equity’ or ‘leveraging’.
Standard:
It is always desirable to have the right mix between proprietor’s and external funds. A very high ratio would mean that the company is financially sound, but is foregoing the benefits of leveraging. A very low ratio would mean an excessive dependence on external funds that might cause problems during periods of slackness in business operations.
Significance:
1. This ratio is a measure of long term solvency
2. It shows the extent of the proprietor’s interest in the business and protection available to long term creditors.
3. It also indicates the method of financing and ‘trading on equity’ or ‘leveraging’.
Standard:
It is always desirable to have the right mix between proprietor’s and external funds. A very high ratio would mean that the company is financially sound, but is foregoing the benefits of leveraging. A very low ratio would mean an excessive dependence on external funds that might cause problems during periods of slackness in business operations.