A company’s retention rate measures the percentage of earnings that are not paid out as dividends. Instead, the earnings are credited to a fund called retained earnings. This is the opposite of the dividend payout ratio. While this number may not seem important, it is a crucial one. If you’re wondering how to calculate your company’s retention rate, read on. You’ll be glad you did. Read on for some tips on how to calculate the retention rate.
Income-oriented investors
The Retention Ratio is an important metric to look for. For income-oriented investors, a high retention ratio can be a red flag. These investors prefer cash dividends, and a high payout ratio may indicate that the company will have difficulty maintaining its 100% dividend in the future. This indicator is also known as the “plowback ratio.”
The Retention Ratio is also known as the “plowback ratio.” A high plowback ratio indicates that the company is focusing more on growth and dividends than on investing in operations. A company with a low retention ratio can’t pay $2.50 per share in dividends. In other words, the Retention Ratio should be low. For income-oriented investors, a low retention ratio would be a red flag.
The Retention Ratio can be useful for growth investors as well. Growth investors use the Retention Ratio to find companies with high cash flow and high dividend payout ratio. They believe that a higher cash flow will eventually translate into higher stock prices. But this is rarely the case. During a business downturn, the management may retain some cash in order to build a reserve for future emergencies. It is important to understand the Retention Ratio to make the most informed decision for your portfolio.
Growth-oriented investors
A higher retention rate indicates that a company’s earnings are being profitably used internally and can be reinvested to drive stock prices. A low retention ratio can be detrimental to a firm, because it can make it difficult to maintain dividends or provide the necessary cash for capital needs. Growth-oriented investors, on the other hand, tend to favor companies with high retention ratios. In other words, high-retention stocks are better buys.
A company’s plowback ratio can be interpreted in several ways, and which one you believe is best for you will depend on your own personal preferences. For example, income-oriented investors may want to invest in companies with low plowback ratios, but growth-oriented investors will often prefer high plowbacks, as they generally indicate higher future capital gains. When analyzing plowback ratios, it is important to determine whether the ratio is high enough for you.