Definition of Retention ratio:
The retention ratio is the proportion of earnings kept back in the business as retained earnings. The retention ratio refers to the percentage of net income that is retained to grow the business, rather than being paid out as dividends. It is the opposite of the payout ratio, which measures the percentage of profit paid out to shareholders as dividends. The retention ratio is also called the plowback ratio.
Companies that make a profit at the end of a fiscal period can use the funds for a number of purposes. The company's management can pay the profit to shareholders as dividends, they can retain it to reinvest in the business for growth, or they can do some combination of both. The portion of the profit that a company chooses to retain or save for later use is called retained earnings.
Percentage of the earnings of a firm that are not paid out to stockholders (shareholders) as dividends but are either reinvested in the firm or are kept as reserve for specified purposes (such as to pay off a debt or purchase a capital asset). Formula: Retained earnings in an accounting period x 100 ÷ earnings in that accounting period.
How to use Retention ratio in a sentence?
- The retention ratio helps investors determine how much money a company is keeping to reinvest in the company's operations.
- After dividends have been paid out, the amount of profit left over is known as retained earnings.
- Growing companies typically have high retention ratios as they are investing earnings back into the company to grow rapidly.
- The retention ratio is the portion of earnings kept back in a firm to grow the business as opposed to being paid out as dividends to shareholders.
- The payout ratio is the opposite of the retention ratio which measures the percentage of profits paid out as dividends to shareholders.
Meaning of Retention ratio & Retention ratio Definition