Retention Ratio Calculator
From net profit and total dividends, compute the retention ratio, the share of earnings kept for reinvestment.
Input Data
Results
At a glance:The retention (plowback) ratio is the share of earnings kept for reinvestment. Retention ratio = (net income − dividends) ÷ net income = 1 − payout ratio. A higher ratio means more earnings are reinvested in the business.
Formula
Retention ratio = (net income − dividends) ÷ net income.
Retention ratio = 1 − payout ratio.
How to Use
- Enter the net income.
- Enter the dividends paid.
- Read the retention ratio.
FAQ
Is a high or low retention ratio better?
Neither is absolutely better; what matters is whether the firm can reinvest retained earnings at a high return. If it has quality growth opportunities, retaining earnings (high ratio) creates more value; if not, retaining them in low-return projects is worse than paying them out. A high retention ratio only makes sense alongside a high ROE — that is the logic behind the sustainable growth rate (retention ratio × ROE).
How is the retention ratio related to the payout ratio?
They are complementary and add up to 100%. The payout ratio is the share of earnings paid to shareholders; the retention ratio is the share reinvested. A 30% payout means a 70% retention ratio. The payout ratio reflects the shareholder-reward stance, the retention ratio the self-development stance — two sides of the same coin.
How does the retention ratio affect growth?
It is the core of the sustainable growth rate: sustainable growth = retention ratio × ROE. That is the maximum growth a firm can support by reinvesting internal earnings without external financing (no new equity or extra borrowing). Higher retention and higher ROE mean faster self-funded growth, so high-growth firms often retain more and pay less.
Can the retention ratio exceed 100% or be negative?
It cannot exceed 100% (that would mean paying out nothing, ratio = 100%). It turns negative when dividends exceed current net profit — the firm 'pays out more than it earns', consuming past reserves, which is usually unsustainable. When net profit is zero or negative the denominator is invalid; this calculator returns 0 at zero net profit. A negative ratio warrants checking whether dividends are being propped up unsustainably.
Why do mature and high-growth firms differ so much in retention ratio?
Because the best use of capital differs by lifecycle stage. High-growth firms (tech, expanding brands) have many high-return opportunities, so retaining earnings (high ratio, low/no dividends) maximises shareholder value via price appreciation. Mature firms (utilities, traditional retail) have limited internal reinvestment opportunities, so returning cash via dividends or buybacks is better. The worst combination is 'high retention + low return' — keeping cash but unable to invest it well destroys value. The test is always whether each retained dollar earns above its cost of capital.
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References
Content review: Calculatorism Finance Team. Results are for reference only; please refer to the relevant authorities for the official figures.