Retention Ratio Excel Template

Description
Retention ratio formula indicates the percentage of a company’s earnings which is not paid out as dividends but credited back as retained earnings.

The formula is the following:
Retention ratio = Retained Earnings / Net Income
or
Retention ratio = 1 - Dividend Payout Ratio

This ratio shows you the amount of profit that is being retained as profits towards the organisation's development and the amount that is getting distributed as dividends to shareholders.

The size of the plowback ratio will attract different types of customers/investors.

> Income-orientated investors generally expect a lower plowback ratio, as this suggests high dividend possibilities to the shareholders.
> Investors who are growth-orientated generally prefer a high plowback ratio, suggesting that a business has profitable internal usage of its earnings. This then increases stock prices.

If the plowback ratio is close to 0%, then there is a high chance of the business not being able to maintain the existing levels of dividends distributed as it is distributing all returns back to the investors. Therefore, the organisation does not have access to sufficient cash to support their capital requirements.

Uses of the ratio:

1. Easy to calculate and suitable for a ball-park comparison amongst sectors/businesses.
2. It can work alongside the dividend payout ratio to plan the future ideas of the firm.

It is important to understand that investor expectations and capital requirements change from one industry to another. Therefore, comparison of plowback ratios will make sense when same industry and/or companies are being made. There is no specific bracket within which the retention ratio should fall into and various other factors must be considered before coming to a conclusion relating to the future opportunities of an organisation. It should be considered just an indicator of possible intentions made by the firm.