Answers the Question
How much money is the company keeping for business purposes?
Calculator for Retention Ratio
What Is the Retention Ratio?
When a company earns money, it can do one of two things. It can either hold on to it for investment and hedging risk, or the firm can return it to investors.
The retention ratio shows how much of the profit a firm keeps for its own uses, relative to what it earns.
Why Is it Important?
- Many businesses, when they are unable to find suitable investments, will decrease their retention ratios. For that reason, investors often assume that low retention ratios signal stagnating firms.
Formula(s) to Calculate Retention Ratio
- RETENTION RATIO = RETAINED EARNINGS / NET INCOME
- Assuming that just because a firm retains significant income that it will be invested wisely.
- Assuming that the primary resource for allocation is money. There are other resources and techniques that may prove far more important for long-term growth.