Retention ratio indicates the percentage of a company's earnings that are not paid out in
dividends
A dividend is a distribution of profits by a corporation to its shareholders, after which the stock exchange decreases the price of the stock by the dividend to remove volatility. The market has no control over the stock price on open on the ex ...
to shareholders but credited to
retained earnings
The retained earnings (also known as plowback) of a corporation is the accumulated net income of the corporation that is retained by the corporation at a particular point in time, such as at the end of the reporting period. At the end of that per ...
. It is the opposite of the
dividend payout ratio
The dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends:
:\mbox=\frac
The part of earnings not paid to investors is left for investment to provide for future earnings growth. Investors seeking high cur ...
, and is a key indicator of how much profit a company is keeping to fund its operations, growth, and development.
The retention ratio can be calculated using the following formula, essentially, the amount of dividends the company pays out divided by its
net income
In business and Accountancy, accounting, net income (also total comprehensive income, net earnings, net profit, bottom line, sales profit, or credit sales) is an entity's income minus cost of goods sold, expenses, depreciation and Amortization (a ...
:
:Retention Ratio = 1 − Dividend Payout Ratio = Retained Earnings / Net Income
This formula can be rearranged to show that the retention ratio plus payout ratio equals 1, or essentially 100%. That is to say that the amount paid out in dividends plus the amount kept by the company comprises all of net income.
Corporate finance
Financial ratios
Dividends
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