Retention Ratio

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

Retention Ratio 

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

 


Retention Ratio Formula

Retention Ratio Interpretation

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

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 earnings retention without examining the entire business.


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