1. What is the Retention Ratio?

The retention ratio (also known as the plowback ratio) measures the proportion of earnings kept back in the business as retained earnings rather than paid out as dividends. It indicates how much profit a company is reinvesting in its operations.

2. How Does the Calculator Work?

The calculator uses the retention ratio formula:

Where:

• \( Dividends \) — Total dividends paid out (GBP)
• \( Profit \) — Net profit after tax (GBP)

Explanation: The ratio shows what percentage of profits are being retained by the company for growth versus being distributed to shareholders.

3. Importance of Retention Ratio

Details: The retention ratio is crucial for understanding a company's growth strategy. Higher ratios suggest more reinvestment in the business, while lower ratios indicate more income returned to shareholders.

4. Using the Calculator

Tips: Enter dividends and profit amounts in GBP. Both values must be positive numbers, with profit 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 (0-30%).

Q2: Can the retention ratio be negative?
A: No, the ratio ranges from 0 to 1. If dividends exceed profits, the calculation isn't meaningful as it would suggest negative retained earnings.

Q3: How does this differ from dividend payout ratio?
A: The dividend payout ratio is Dividends/Profit, while retention ratio is 1 minus that value. They are complementary measures.

Q4: Should UK companies use different calculations?
A: The formula is universal, but UK companies should ensure dividends and profit figures are calculated according to UK accounting standards.

Q5: How often should retention ratio be calculated?
A: Typically calculated annually with financial statements, but can be done quarterly for more frequent analysis.