Retention Ratio Calculator
Calculate the retention ratio (also known as plowback ratio) to determine what percentage of net income a company retains for reinvestment rather than paying out as dividends. This ratio helps assess a company's growth strategy and reinvestment commitment.
Financial Metrics
Retention Ratio Results
Retention Ratio:
0.00%
Retained Earnings:
$0.00
Growth Strategy:
N/A
Dividend Analysis
Dividend Payout Ratio:
0.00%
Dividend Yield Potential:
N/A
Shareholder Focus:
Business Insights
Reinvestment Capacity:
N/A
Growth Sustainability:
N/A
Strategic Direction:
N/A
Understanding Retention Ratio
The retention ratio, also known as the plowback ratio, measures the percentage of net income that a company retains for reinvestment in the business rather than distributing to shareholders as dividends. This ratio provides insight into a company's growth strategy and commitment to internal expansion.
Retention Ratio Formula
Basic Formula
- Retention Ratio = (Net Income - Dividends) / Net Income
- Retention Ratio = 1 - Dividend Payout Ratio
- Expressed as a percentage
- Shows reinvestment commitment
Alternative Formula
- Retention Ratio = Retained Earnings / Net Income
- Same calculation, different perspective
- Focuses on actual retention
- After all distributions
Retention Ratio Interpretation
Strategic Implications
What retention ratio reveals about company strategy
High Retention Ratio (80-100%)
- Growth-oriented strategy
- Heavy reinvestment in business
- Lower immediate shareholder returns
- Focus on long-term value creation
Moderate Retention (40-80%)
- Balanced approach
- Some dividends, some reinvestment
- Stable growth strategy
- Attracts diverse investors
Low Retention Ratio (0-40%)
- Income-oriented strategy
- Higher dividend payouts
- Limited growth opportunities
- Mature, stable companies
Zero Retention (0%)
- All profits distributed
- No internal reinvestment
- Trust or REIT structure
- Maximum current income
Retention Ratio and Growth
| Growth Model | Formula | Key Insight |
|---|---|---|
| Sustainable Growth Rate | SGR = ROE × Retention Ratio | Maximum growth without external financing |
| Internal Growth Rate | IGR = ROA × Retention Ratio | Growth from internal sources only |
| Earnings Growth | g = ROE × b | Expected earnings growth rate |
Industry Variations
Growth Industries
- Technology, biotech
- High retention ratios (80-95%)
- Reinvestment critical for growth
- Lower dividend expectations
Mature Industries
- Utilities, consumer staples
- Lower retention ratios (30-60%)
- Stable cash flows
- Higher dividend payouts
Retention vs Payout Ratio
Retention Ratio
- Percentage retained for growth
- Focus on reinvestment
- Growth-oriented investors
- Future value creation
Dividend Payout Ratio
- Percentage paid as dividends
- Focus on current income
- Income-oriented investors
- Current cash returns
Factors Affecting Retention Decisions
Company Factors
- Growth opportunities available
- Cash flow stability
- Capital requirements
- Management confidence
Market Factors
- Investor preferences
- Interest rate environment
- Tax treatment of dividends
- Stock market conditions
Key Takeaways for Retention Ratio
- Retention Ratio = (Net Income - Dividends) / Net Income measures the percentage of profits retained for reinvestment
- Higher retention ratios indicate growth-oriented companies that reinvest heavily in their business
- Retention ratio is the inverse of the dividend payout ratio
- Retention ratio directly impacts sustainable growth rate calculations
- Compare retention ratios within the same industry for meaningful analysis
- Growth companies typically have higher retention ratios than mature companies
- Retention ratio trends over time reveal changes in company strategy
- Balance between retention for growth and dividends for shareholder returns