What is the index of conservatism in capital structure?

The correct answer is - Proprietory Ratio

Key Points

• Proprietory Ratio
  • The proprietory ratio is an indicator of the index of conservatism in the capital structure of a company.
  • It measures the proportion of shareholders' funds (equity) to total assets, reflecting the company's reliance on its own funds versus borrowed funds.
  • A higher proprietory ratio signifies that the company is more financially conservative as it relies more on equity than debt.
  • This ratio is calculated as:
    • Proprietory Ratio = Shareholders' Funds / Total Assets

Additional Information

• Working Capital Ratio
  • Also known as the current ratio, it measures the company's ability to pay short-term obligations using its current assets.
  • Formula: Current Assets / Current Liabilities
  • This ratio does not directly indicate conservatism in capital structure but focuses on liquidity.
• Operating Ratio
  • Measures the proportion of operating expenses to net sales, reflecting operational efficiency rather than capital structure.
  • Formula: Operating Expenses / Net Sales
• Price Earning Ratio (P/E Ratio)
  • Indicates the market perception of the company's earnings growth potential.
  • Formula: Market Price per Share / Earnings per Share
  • This ratio is unrelated to the capital structure conservatism.