1. What is Retention Ratio?

The Retention Ratio (also called the plowback ratio) measures the percentage of net income that is retained by a company rather than distributed to shareholders as dividends. It indicates how much profit is being reinvested in the business.

2. How Does the Calculator Work?

The calculator uses the retention ratio formula:

Where:

• \( \text{Retained Earnings} \) — The portion of net income not paid out as dividends (USD)
• \( \text{Net Income} \) — The company's total earnings after all expenses and taxes (USD)

Explanation: The ratio shows what percentage of profits are being reinvested in the company versus being paid out to shareholders.

3. Importance of Retention Ratio

Details: The retention ratio is important for investors to understand a company's growth strategy. High retention ratios typically indicate companies focused on growth, while low ratios may indicate mature companies returning value to shareholders.

4. Using the Calculator

Tips: Enter both retained earnings and net income in USD. Net income must be greater than zero for the calculation to be valid.

5. Frequently Asked Questions (FAQ)

Q1: What is a good retention ratio?
A: It depends on the company's growth stage. Growth companies typically have high ratios (70-100%), while mature companies may have lower ratios (0-30%).

Q2: How is retention ratio related to dividend payout ratio?
A: Retention ratio + dividend payout ratio = 100%. They are complementary measures.

Q3: Can retention ratio be negative?
A: Yes, if a company has negative retained earnings (accumulated losses) but positive net income.

Q4: Where can I find these numbers for a company?
A: Both retained earnings and net income are reported on a company's income statement and balance sheet in its financial reports.

Q5: Does a high retention ratio always mean better growth?
A: Not necessarily. The effectiveness depends on how well the company reinvests the retained earnings.