1. What is the Retention Ratio?

The retention ratio (also known as the plowback ratio) measures the proportion of net income that is retained by a company rather than paid out as dividends. It indicates how much profit is being reinvested in the business versus being distributed to shareholders.

2. How Does the Calculator Work?

The calculator uses the retention ratio formula:

Where:

• \( Net\ Income \) — Company's total earnings after expenses and taxes (USD)
• \( Dividends \) — Total dividends paid out to shareholders (USD)

Explanation: The ratio shows what percentage of net income is retained for business growth after dividends are paid out.

3. Importance of Retention Ratio

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

4. Using the Calculator

Tips: Enter net income and dividends in USD. Both values must be positive numbers, and dividends cannot exceed net income.

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 does retention ratio relate to dividend payout ratio?
A: They are complementary - retention ratio + dividend payout ratio = 1 (or 100%).

Q3: Can the retention ratio be negative?
A: No, since dividends cannot exceed net income in this calculation. Negative net income would make the ratio undefined.

Q4: Why is retention ratio important for research?
A: It helps researchers analyze a company's reinvestment strategy and potential for future growth.

Q5: How often should retention ratio be calculated?
A: Typically calculated quarterly with financial statements, but annual calculations are common for trend analysis.