Retention ratio indicates the percentage of a company's earnings that are not paid out in
dividends
A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-in ...
but credited to
retained earnings
The retained earnings (also known as plowback) of a corporation is the accumulated net income of the corporation that is retained by the corporation at a particular point of time, such as at the end of the reporting period. At the end of that peri ...
. It is the opposite of the
dividend payout ratio The dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends:
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The part of earnings not paid to investors is left for investment to provide for future earnings growth. Investors seeking high curr ...
, so that also called the retention rate.
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.
Corporate finance
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