Calculate the earnings retention ratio from net income and dividends paid to see how much profit is reinvested versus distributed to shareholders.
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The retention ratio (plowback ratio) measures the proportion of net income that a company retains for reinvestment rather than distributing as dividends. It is the complement of the dividend payout ratio and a key input to sustainable growth rate calculations.
A retention ratio of 60% means the company keeps 60 cents of every dollar of profit and distributes 40 cents as dividends. Higher retention funds more internal growth; higher payout rewards current shareholders at the expense of future investment capacity.
Growth-stage companies typically retain 80–100% of earnings, while mature dividend-paying companies may retain only 30–50%.
Calculated from net income and total dividends paid.
Retention Ratio = (Net Income − Dividends) / Net Income × 100
Equivalently: Retention Ratio = 1 − Dividend Payout Ratio.
A company earns 500,000 in net income and pays 200,000 in dividends. Retention = (500,000 − 200,000) / 500,000 = 60%. The payout ratio is 40%.
Does not distinguish between productive reinvestment and value-destroying capital allocation. A high retention ratio is only beneficial if the company earns returns above its cost of capital on retained funds.
Frequently asked questions
There is no universal answer. Growth companies may retain 80–100%. Mature income stocks may retain 30–50%. The optimal ratio depends on the company's ROE and growth opportunities.
Sustainable Growth Rate = ROE × Retention Ratio. Higher retention supports faster organic growth, provided ROE remains stable.
If dividends exceed net income (paid from retained earnings or borrowings), the payout ratio exceeds 100% and the retention ratio becomes negative. This is unsustainable long-term.
Yes — they are identical. Both refer to the fraction of earnings retained rather than distributed as dividends.
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