Retention ratio

This article is about the financial measure of profits reinvested in a corporation. For the measure of customers or participants retained, see retention rate.

This article is about the financial ratio of profits reinvested in a corporation. For the performance measure of customers or participants retained, see retention rate.

Retention ratio indicates the percentage of a company's earnings that are not paid out in dividends to shareholders but credited to retained earnings. It is the opposite of the dividend payout ratio, and is a key indicator of how much profit a company is keeping to fund its operations, growth, and development.

Calculation

The retention ratio can be calculated using the following formula:

Retention Ratio = 1 − Dividend Payout Ratio = Retained Earnings / Net Income

The payout ratio is the amount of dividends the company pays out divided by the 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.