1. What is Retention Ratio?

The retention ratio (or plowback ratio) is the proportion of earnings kept back in the business as retained earnings rather than paid out as dividends. It shows how much profit a company reinvests in its operations.

2. How Does the Calculator Work?

The calculator uses the retention ratio formula:

Where:

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

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

3. Importance of Retention Ratio

Details: The retention ratio is a key indicator of a company's growth strategy. Higher retention ratios typically indicate companies that are reinvesting more in growth opportunities rather than paying dividends.

4. Using the Calculator

Tips: Enter the payout ratio as a decimal between 0 and 1 (e.g., 0.4 for 40%). The calculator will compute the retention ratio.

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 (0.7-1.0), while mature companies may have lower ratios.

Q2: How does retention ratio relate to growth?
A: Higher retention ratios allow companies to reinvest more in growth opportunities, potentially leading to higher future earnings.

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

Q4: What's the difference between retention ratio and payout ratio?
A: They're complements - payout ratio shows what percentage is paid out, retention ratio shows what's kept.

Q5: How often should retention ratio be calculated?
A: Typically calculated annually when financial statements are released, but can be calculated quarterly as well.