1. What is the Retention Ratio?

The Retention Ratio (also known as the plowback ratio) measures the proportion of earnings retained by a company rather than paid out as dividends. It indicates how much profit is being reinvested in the company.

2. How Does the Calculator Work?

The calculator uses the Retention Ratio formula:

Where:

• \( Retention \) — The retention ratio (decimal)
• \( Dividend\ Payout \) — The dividend payout ratio (decimal)

Explanation: The formula simply subtracts the dividend payout ratio from 1 to find what percentage of earnings is retained.

3. Importance of Retention Ratio

Details: The retention ratio is crucial for understanding a company's growth strategy. Higher ratios indicate more earnings are being reinvested, which could lead to future growth.

4. Using the Calculator

Tips: Enter the dividend payout ratio as a decimal (e.g., 0.4 for 40%). The value must be between 0 and 1.

5. Frequently Asked Questions (FAQ)

Q1: What's a good retention ratio?
A: It depends on the company's growth stage. Growth companies typically have high retention ratios (70-100%), while mature companies may have lower ratios.

Q2: How does retention ratio relate to ROE?
A: Retention ratio is part of the sustainable growth rate formula: Sustainable Growth Rate = ROE × Retention Ratio.

Q3: Can retention ratio be negative?
A: No, it ranges from 0 (all earnings paid out) to 1 (no dividends paid).

Q4: What if dividend payout exceeds earnings?
A: The calculator assumes valid inputs (0-1). Payouts >100% would require special interpretation.

Q5: How often should retention ratio be calculated?
A: Typically calculated quarterly with financial statements, or annually for long-term analysis.