The retention ratio is a measure of the amount of money that a company keeps in its coffers. It is often used as a basis for comparing companies of similar scale. A high retention ratio can indicate that the company can reinvest those funds for future growth. Growth investors look at this ratio to determine whether the company has enough cash to invest in new projects or grow. It is the inverse of the dividend payout ratio. Here are some tips to help you interpret this measurement.
Growth investors look at retention ratio to determine whether a company can reinvest funds for growth
Retention ratio is often used by growth investors to assess a company’s ability to reinvest its earnings in future growth. This measure is the inverse of the payout ratio, and investors should consider other financial metrics when evaluating a company’s growth potential. Companies with a high retention ratio often do not reinvest much of their earnings and may not be as well-positioned to grow as others.
A high retention ratio signals a company’s ability to reinvest earnings to fuel growth. Generally, growth companies will have a higher retention ratio than their value-oriented counterparts. This means that a company has been able to generate enough free cash flow over the years to grow at an impressive pace. This is good news for growth investors. Growing companies are a great place to invest, as they are expected to produce high earnings and have plenty of excess cash flow.
It is inverse of dividend payout ratio
The dividend payout ratio is a measure of a company’s ability to cover its dividend payments with the company’s current net income. Dividends are the company’s distribution of earnings to its owners. There are two basic types of dividends: preferred dividends and common dividends. Preferred dividends are interest-like dividends paid to preferred stock-holders. A company’s dividend coverage ratio is determined by dividing the payout ratio by the current net income available to common stock-holders.
The inverse of the dividend payout ratio is the retention ratio. In other words, if a company earns $100 million and pays out $20 million in dividends, its retention ratio would be 20%. As a result, it is actually keeping 80% of its net income. To calculate the retention ratio, you can use earnings per share or dividends per share as the numerator and the stock price as the denominator.