Which ratio is calculated to know the extent of outsiders funds and shareholders funds in acquiring the assets for a firm ?

Question

Accepted Answer

The correct option is 1:
The **Debt-equity Ratio** is the precise financial metric designed to measure the relationship between a firm's borrowed capital (outsiders' funds) and its owners' capital (shareholders' funds). Calculated as Total Debt divided by Shareholders' Funds (or Net Worth), this ratio is a fundamental tool for assessing a company's financial structure or 'gearing.' It explicitly indicates the extent to which a company relies on external lenders versus internal owners to finance its asset base. A higher ratio signals greater risk for both creditors and owners, as the firm has a larger proportion of debt obligations that must be serviced, directly answering the question of comparing the extent of funds from these two sources.

The incorrect option is 2:
The **Proprietary Ratio** is a measure of solvency, calculated as Shareholders’ Funds divided by Total Assets. While it involves shareholders’ funds, its purpose is to show what percentage of the total assets is backed by the owners’ equity. It does not provide the direct comparison between 'outsiders funds' and 'shareholders funds' that the question asks for. This ratio focuses on the security margin for general creditors by showing the proportion of assets financed by the company's proprietors.

The incorrect option is 3:
The term **Net Worth Ratio** is ambiguous in standard financial analysis. 'Net Worth' is commonly synonymous with 'Shareholders' Funds,' meaning a 'Net Worth Ratio' is often just another name for the Proprietary Ratio (Net Worth to Total Assets). Even if interpreted as Net Worth to Debt, it reverses the comparison requested. Regardless of the interpretation, it is not the primary or specific ratio used to compare the *extent* of outsiders' funds versus shareholders' funds, which is the established role of the Debt-Equity Ratio.

The incorrect option is 4:
The **Return on Capital Employed Ratio (ROCE)** is fundamentally a measure of profitability, calculated as Earnings Before Interest and Tax (EBIT) divided by Capital Employed. Capital Employed represents the total long-term funds used (Debt + Equity). This ratio measures the efficiency of the firm in using its overall capital to generate profits, and thus, it does not determine the *extent* or proportion of financing between outsiders' funds and shareholders' funds for acquiring assets.