1. What is the 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 shows how much profit is being reinvested in the business.

2. How Does the Calculator Work?

The calculator uses the retention ratio formula:

Where:

• \( Retained \) — The amount of earnings kept by the company (USD)
• \( Earnings \) — The total net income of the company (USD)

Explanation: The ratio shows what proportion of earnings is being reinvested in the company versus being paid out as dividends.

3. Importance of Retention Ratio

Details: The retention ratio is important for investors to understand a company's growth strategy. Higher ratios indicate more reinvestment for growth, while lower ratios indicate more income distributed to shareholders.

4. Using the Calculator

Tips: Enter the retained earnings and total earnings amounts in USD. Both values must be positive, and earnings must be greater than zero.

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 retention ratios (70-100%), while mature companies may have lower ratios.

Q2: How is retention ratio related to dividend payout ratio?
A: Retention ratio = 1 - Dividend Payout Ratio. They are complementary percentages that add up to 100%.

Q3: Can retention ratio be negative?
A: No, it ranges from 0 to 1 (or 0% to 100%). Negative values would indicate calculation errors.

Q4: Where can I find retained earnings and net income data?
A: These figures are reported on a company's income statement and balance sheet in their financial reports.

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