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Retention Ratio Formula:
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The Retention Ratio (also known as the plowback ratio) is the proportion of net income that is retained by a company rather than paid out as dividends. It represents the percentage of earnings kept in the business for growth and expansion.
The calculator uses the Retention Ratio formula:
Where:
Explanation: The formula simply subtracts the payout ratio from 1 to determine what percentage of earnings is retained.
Details: The retention ratio is a key metric for investors analyzing a company's growth potential. Higher retention ratios typically indicate companies that are reinvesting more in their own growth, while lower ratios may indicate mature companies returning profits to shareholders.
Tips: Enter the payout ratio as a decimal (e.g., 0.4 for 40%). The value must be between 0 and 1. The calculator will compute the retention ratio as a decimal.
Q1: What's a good retention ratio?
A: It depends on the company's growth stage. High-growth companies often have retention ratios above 0.8 (80%), while mature companies might have ratios below 0.5 (50%).
Q2: How does retention ratio relate to dividend policy?
A: They are inversely related. A higher retention ratio means lower dividend payouts, and vice versa.
Q3: Can the retention ratio be negative?
A: No, the retention ratio ranges from 0 to 1. A ratio of 0 means all earnings are paid out as dividends, while 1 means all earnings are retained.
Q4: How does retention ratio affect stock valuation?
A: Higher retention ratios can lead to higher future growth but may reduce current dividend income. The optimal ratio depends on the company's return on reinvested capital.
Q5: What's the difference between retention ratio and profit margin?
A: Profit margin measures what percentage of revenue becomes profit, while retention ratio measures what percentage of profit is retained rather than paid out as dividends.