What Is The Retention Ratio?

A retention ratio measures the percentage of a company’s earnings that are retained instead of being paid out in dividends. It is the opposite of the dividend payout ratio, which indicates how much of the company’s earnings are actually paid out in dividends. It is often referred to as the “retention rate” to differentiate it from the dividend payout ratio. Retention rates are a great way to gauge a company’s commitment to giving investors a return on their investment.

Retention ratio is a measure of a company’s reinvestment rate

A high retention ratio indicates a strong company, but a low retention rate does not necessarily mean a weak company. A company may be generating a large profit, and yet have a low retention rate, indicating that it is not at risk of being liquidated. Furthermore, a company may have made an important payment to investors as part of its restructuring or reorganization efforts. However, calculating only a few financial ratios does not give a clear picture of a company’s health and growth prospects. This ratio should be analyzed along with the company’s growth lifecycle and its peers.

It affects dividend distribution decision

The retention ratio reflects the amount of money that the company retains as profits. High retention ratios indicate a firm with confident and rational management. It also reflects that management makes decisions with the best interests of shareholders in mind. The ratio tends to be lower in mature companies, which tend to have large cash reserves, also known as cash cows. For this reason, investors should consider the retention ratio before determining whether to increase their dividend payments.