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# How to Calculate the Retention Ratio

Often referred to as the retention rate, the retention ratio indicates the percentage of earnings that are not paid out as dividends but are instead credited to the company’s retained earnings. This measure is the opposite of the dividend payout ratio, which is the ratio of earnings that are distributed as cash to shareholders. Listed below are some common types of retention ratios and how to calculate them. The information provided is based on the industry in which the company operates.

## Limitations

Using the retained earnings to market value ratio (REMV) is a great way to gauge a firm’s value. While higher ratios are generally good for investors, they do not necessarily indicate that a company is producing dividends. Instead, high REMVs typically indicate that a company is not paying dividends and its stock price is appreciating because of its growth prospects. The retention ratio helps investors separate growth stocks from earnings stocks.

Retention ratios have limitations. For example, the metric assumes that a company’s cash flows exactly match its reported net income. In reality, cash flows may differ by a large margin. Thus, it is not always possible to compare a company’s REMV to its reported net income. The retention ratio is the inverse of the dividend payout ratio, which measures the proportion of net income paid out to shareholders.

## Benefits

Retention ratio is a key metric for investors. A higher retention ratio is indicative of a company that is likely to grow and pay out higher dividends. If retained earnings are higher than total dividends paid out, the company is likely to be on a growth track and can be used to fund future plans, such as business development and working capital management. Companies can determine the retention ratio by analyzing their own balance sheets.

In order to calculate the retention ratio, you must consider the stage of your company. Many companies that are still in their early stages are inclined to retain more of their earnings than mature ones. Likewise, companies that are already established have less need to retain profits and pay higher dividends. An example of such a company is Apple, which retains a high percentage of its profits. Apple’s high retention ratio reflects its commitment to technology up-gradation and innovation.

## Calculation

Several factors influence a company’s retention ratio. When a company experiences low revenue, it may be keeping all its earnings or reducing its losses. However, a company’s retention rate can be higher than its peers’. For example, Tesla has a negative retention ratio, meaning that it’s paying out more cash to its shareholders than it earns. This is not necessarily a bad thing, as it may mean that management is more focused on improving the business than on reducing its debt.

When calculating the retention rate, companies look at retained earnings as a percentage of their total profits. They can find this information in the equity section of their balance sheet. The retained earnings are then calculated by deducting the total dividends paid by the company from its net profit. However, the ratio has its limitations. For example, a company with a \$100 million revenue will have a net income of \$10 million – a high percentage – of the net income. This would mean that the company will pay out \$1 million in dividends to its shareholders.

## Industry

The industry retention ratio is an important measure of a company’s profitability. Investors may compare a company’s retention ratio to those of competitors in the same industry. Moreover, the ratio may be tracked over several fiscal quarters, enabling company leaders to gauge the growth and profitability of their company. The following are three common ways to measure a company’s industry retention ratio. This article provides an overview of these metrics. Read on to learn more.

Retention ratios may not be a perfect indicator of a company’s financial health. Although a high retention ratio reflects a growth-oriented strategy, it is not a guarantee that profits are being used effectively. Companies with a high retention ratio may be hoarding their profits instead of investing them. To determine whether a company’s retention ratio is high or low, look at it over a long period of time and compare it to similar firms in the same industry.