Enter the net income and dividends into the calculator to determine the retention ratio of an asset or business.

## Retention Ratio Formula

The following equation can be used to calculate the retention ratio.

RR = (NI-D)/NI
• Where RR is the retention ratio
• NI is the net income
• D is the dividends

## Retention Ratio Definition

A retention ratio refers to the proportion of a company’s earnings that are retained and reinvested into the business rather than being paid out as dividends to shareholders.

This ratio provides insight into how much of the profits a company generates are being plowed back into the business for growth and expansion.

The retention ratio is crucial because it directly impacts a company’s ability to fund its future growth and generate higher returns for its shareholders.

When a company retains a larger portion of its earnings, it has more financial resources available to invest in research and development, acquire new assets, expand operations, or reduce debt. By doing so, the company strengthens its competitive position in the market and enhances its long-term profitability potential.

A high retention ratio indicates that the company’s management has confidence in the firm’s ability to generate higher future earnings.

On the other hand, a low retention ratio suggests that the company may lack growth prospects or face limitations in generating higher returns. It could indicate that the company prefers to distribute its profits to shareholders through dividends, which may be more appealing to income-seeking investors. However, a consistently low retention ratio could hinder the company’s ability to compete and expand in the long run.

## Retention Ratio Example

How to calculate a retention ratio?

1. First, determine the net income.

Calculate the net income generated by the investment.

2. Next, determine the dividends.

Calculate the dividends paid out by the investment.

3. Finally, calculate the retention ratio.

Using the equation above, calculate the retention ratio.

## FAQ

What is a retention ratio?

A retention ratio is a ratio or measure of how much income is retained after dividends are paid out to investors.

What is a dividend?

A dividend is a regularly occurring payment made to investors of a company.