Retention ratio

 ( Corporate Finance ) 

Retention ratio indicates the percentage of a company's earnings that are not paid out in dividends to shareholders but credited to retained earnings. It is the opposite of the dividend payout ratio, and is a key indicator of how much profit a company is keeping to fund its operations, growth, and development.

The retention ratio can be calculated using the following formula, essentially, the amount of dividends the company pays out divided by its net income:

Retention Ratio = 1 − Dividend Payout Ratio = Retained Earnings / 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.