What is a Retention Ratio?
Retention Ratio Calculator: The retention ratio, also known as the plowback ratio, is a financial metric that measures the portion of a company’s net income that is retained rather than distributed as dividends. It indicates how much of the earnings are reinvested back into the business to drive growth.
How to Calculate Retention Ratio
The formula for calculating the retention ratio is:
Retention Ratio = 1 - Dividend Payout Ratio
Alternatively, it can be expressed as:
Retention Ratio = Retained Earnings / Net Income
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Why Use a Retention Ratio Calculator?
A retention ratio calculator simplifies the process of determining how much profit a company keeps for reinvestment. This tool is particularly useful for investors and analysts who are evaluating a company's growth potential and financial health.
Steps to Use a Retention Ratio Calculator
- Enter the company's net income.
- Enter the total dividends paid.
- The calculator will compute the retention ratio automatically using the formula.
Benefits of the Retention Ratio
- Helps assess a company’s growth strategy.
- Provides insight into how earnings are utilized.
- Assists in comparing companies within the same industry.