What is the Retention Ratio?

A retention ratio is the percentage of earnings that are not distributed as dividends but are credited to retained earnings. It is the opposite of the dividend payout ratio. If you’re interested in determining whether a company is financially stable, you should study the retention ratio. But what is it really? How do you calculate it? And how does it impact the bottom line? Read on to learn more. Let’s dive into some common examples of retention ratios and their use in investing.

Retention ratio is a fundamental analysis tool

The Retention ratio is an important fundamental analysis tool that is used to measure how much a company is holding onto its earnings. This ratio represents the amount of earnings a company keeps in the business rather than distributing it as dividends. Companies with large retention ratios do not necessarily invest all of their funds back into the business, and they might even be holding onto their cash for the purpose of acquisitions or growth.

Fundamental analysis is a process that involves looking at microeconomic and macroeconomic factors. These include GDP, interest rates, financial markets, industry growth expectations, news, and analyst projections. When the fundamentals of a company are sound, its price will likely increase. Fundamentals are the key to making smart investments and avoiding the mistakes of many investors. There are a lot of benefits to fundamental analysis, but it takes time.

It is an indicator of financial stability

One measure of financial stability is the growth of credit. Excessive credit growth is a key indicator of instability. Although it may not be directly related to economic growth, this indicator is often a leading predictor of future banking crises. Indeed, 75 percent of credit booms in emerging markets end in a banking crisis. Unlike other indicators, this one is easy to measure but difficult to assess ex ante.

The distribution of systemic loss attempts to fill in some of the gaps in existing measures of financial stability. It combines three key elements: the probability of default for each institution, the size of the loss if an institution defaults, and the “contagious” nature of defaults between institutions. This indicator aims to measure the risk of financial crisis by anticipating the next one. Ultimately, financial stability is the best predictor of economic growth, so identifying a systemic threat will help us to avoid future crises.