Earnings Retention Ratio

Earnings Retention Ratio measures the percentage of earnings retained after dividends have been paid out to the shareholders. Other names for the Earnings Retention Ratio are Plowback Ratio, Retention Rate and Retention Ratio.

Earning Retention Ratio 

Earnings Retention Ratio measures the percentage of earnings retained after dividends have been paid out to the shareholders. Other names for the Earnings Retention Ratio are Plowback Ratio, Retention Rate and Retention Ratio.  

The philosophy behind the Earnings Retention Ratio is that the more earnings the company retains, the more capital it has available for growing the business.  There is always a conflict when it comes to the Retention Ratio as company managers would like to see a high level of earnings retention, while shareholders would think otherwise.


Earnings Retention Ratio Formula

The formula for Retention Rate first calculates the retained earnings by subtracting dividends paid from the net income.  Then the Retention Rate is calculated by dividing the retained earnings by the net income.

Earnings Retention Ratio Interpretation

Investors prefer to have a high retention ratio in a high growth business, and a low retention ratio in a slow growth (mature) business.  Company growth is not only due to retention of earnings but also other factors. Therefore it is not sufficient to simply look at the Earnings Retention Ratio without examining the entire business.

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