Proprietary ratio refers to a ratio which helps the creditors of the company in seeing that their capital or loans which the creditors have given to the company are safe. Proprietary ratio can be calculated as follows – Proprietors funds/Total Assets
In the above formula proprietary funds includes equity and preference share capital of the company and reserves and surplus of the company, while total assets of company includes both fixed assets and current assets of the company but it excludes fictitious assets which company may have.
Proprietary ratio highlights the financial position of the company and therefore Proprietary ratio can be interpreted as good if it is high because a higher proprietary ratio would imply that company has enough capital to repay its creditors whenever any such demand is made by the creditors. A lower proprietary ratio would imply that company is not in a position to pay all of its creditors and therefore a low proprietary ratio is a cause of concern for the creditors of the company.