Definition – What is the Retention Ratio?
The retention ratio shows how much net income is reinvested in the business (as opposed to paid out as dividends to shareholders).
Formula – How to calculate the Retention Ratio
Retention Ratio = (Net Income – Dividends) / Net Income
A business has net income of $10,000 and dividends of $5,000.
Retention Ratio = ($10,000 – $5,000) / $10,000 = $5,000 / $10,000 = 0.50
Therefore, this business has a retention ratio of 0.50.
Sources and more resources
- Wikipedia – Retention Ratio – A short Wikipedia entry on the retention ratio.
- Accounting Tools – Retention ratio – An explanation of retention ratio and the formula to calculate it.
- FinanceFormulas.net – Retention Ratio – The formula for retention ratio.
- Investopedia – Retention Ratio – An explanation and break down of “retention ratio.”