{"id":12248,"date":"2021-10-24T20:08:23","date_gmt":"2021-10-24T20:08:23","guid":{"rendered":"https:\/\/www.5paisa.com\/finschool\/?post_type=finance-dictionary&#038;p=12248"},"modified":"2021-12-08T08:18:18","modified_gmt":"2021-12-08T08:18:18","slug":"what-is-a-retention-ratio","status":"publish","type":"finance-dictionary","link":"https:\/\/www.5paisa.com\/finschool\/finance-dictionary\/what-is-a-retention-ratio\/","title":{"rendered":"Retention Ratio"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"12248\" class=\"elementor elementor-12248\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-13eec102 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"13eec102\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-649d0b8e\" data-id=\"649d0b8e\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-7ca85bdc elementor-widget elementor-widget-text-editor\" data-id=\"7ca85bdc\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<h5><strong><span style=\"color: #000080;\">What Is Retention Ratio?<\/span><\/strong><\/h5><p>The retention ratio (also known as the net income retention ratio) is the ratio of a company\u2019s retained income to its\u00a0net income. The retention ratio measures the percentage of a company\u2019s profits that are reinvested into the company in some way, rather than being paid out to investors as\u00a0dividends. It is the opposite of the\u00a0payout ratio, which measures the percentage of profit paid out to shareholders as dividends. The retention ratio is also called the plowback ratio.<\/p><p style=\"text-align: center;\"><strong>Retention Ratio = Retained Earnings \/ Net Income<\/strong><\/p><p>The numerator of this equation calculates the earnings that were retained during the period since all the profits that are not distributed as dividends during the period are kept by the company.\u00a0<\/p><p style=\"text-align: center;\"><strong>Retained Earnings<\/strong> = Net income- Dividends<\/p><p>Since companies need to retain some portion of their profits in order to continue to operate and grow, investors value this ratio to help predict where companies will be in the future. Apple, for instance, only started paying dividends in the early 2010s. Up until then, the company retained all of its profits every year.<\/p><p>This is true about most tech companies. They rarely give dividends because they want to reinvest and continue to grow at a steady rate. The opposite is true about established companies like GE. GE gives dividends every year to it shareholders.<\/p><p>The size of the retention ratio attracts different types of customers\/investors.<\/p><ul><li><p>Investors who are income-oriented would expect a lower retention ratio, as this suggests high dividend possibilities to the shareholders.<\/p><\/li><li><p>Growth-oriented investors will prefer a high retention ratio\u00a0implying that the business\/firm has profitable internal usage of its earnings. This, in turn, would push up the stock prices.<\/p><\/li><\/ul><p>If the retention ratio is close to 0%, there is a greater possibility of the firm being unable to maintain the existing levels of dividends distributed since it is distributing all returns back to the investors. Thus, sufficient cash is not available to support the capital requirements of the business.<\/p><p>Example: &#8211;<\/p><p>Mr. X\u2019s Company earned Rs.1,00,000 of net income during the year and decided to distribute Rs.20,000 of dividends to its shareholders. Here is how X would calculate its retention ratio.<\/p><p style=\"text-align: center;\">Retention Ratio= (1,00,000-20,000)\/1,00,000= 80%<\/p><p>As one can see, X\u2019s rate of retention is 80 percent. In other words, X keeps 80 percent of his profits in the company. Only 20 percent of his profits are distributed to shareholders. Depending on his industry this could a standard rate or it could be high.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"<p>What Is Retention Ratio? The retention ratio (also known as the net income retention ratio) is the ratio of a company\u2019s retained income to its\u00a0net income. The retention ratio measures the percentage of a company\u2019s profits that are reinvested into the company in some way, rather than being paid out to investors as\u00a0dividends. It is &#8230; <a title=\"Retention Ratio\" class=\"read-more\" href=\"https:\/\/www.5paisa.com\/finschool\/finance-dictionary\/what-is-a-retention-ratio\/\" aria-label=\"Read more about Retention Ratio\">Read more<\/a><\/p>\n","protected":false},"author":1,"featured_media":12838,"parent":0,"menu_order":320,"comment_status":"closed","ping_status":"closed","template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"class_list":["post-12248","finance-dictionary","type-finance-dictionary","status-publish","format-standard","has-post-thumbnail","hentry","finance-dictionary-terms-r"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/finance-dictionary\/12248","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/finance-dictionary"}],"about":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/types\/finance-dictionary"}],"author":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/comments?post=12248"}],"version-history":[{"count":3,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/finance-dictionary\/12248\/revisions"}],"predecessor-version":[{"id":14394,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/finance-dictionary\/12248\/revisions\/14394"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/media\/12838"}],"wp:attachment":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/media?parent=12248"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}