What is the index of conservatism in capital structure ?
Proprietory Ratio
Capital structure conservatism refers to how far a firm relies on owners' funds rather than borrowed funds. The proprietary ratio (proprietors' funds ÷ total assets) measures exactly this.
A high proprietary ratio shows that most assets are financed by owners, giving creditors a large safety margin, i.e. a conservative capital structure; a low ratio indicates heavy dependence on outside funds.
The working capital ratio measures short-term liquidity, the operating ratio measures operating efficiency (operating cost to sales) and the price earning ratio is a market valuation measure; none of them reflects the owners' share in financing.
Hence, the index of conservatism in capital structure is the Proprietory Ratio.
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