Retention Ratio Calculator

What is the Retention Ratio?

The retention ratio (also known as the plowback ratio) measures the proportion of a company's net income that is retained and reinvested into business operations rather than paid out to shareholders as cash dividends. It indicates how aggressively a firm is funding its internal expansion, capital investments, and debt paydown from organic earnings.

Formula for Retention Ratio

The retention ratio can be calculated using total financial figures or per-share metrics:

$$\text{Retention Ratio } (b) = \left(\frac{\text{Net Income} - \text{Dividends Paid}}{\text{Net Income}}\right) \times 100$$

Alternatively, using the dividend payout ratio:

$$\text{Retention Ratio} = 100\% - \text{Dividend Payout Ratio}$$

Sustainable Growth Rate (SGR)

The retention ratio is a key component in calculating a corporation's Sustainable Growth Rate (SGR), which defines the maximum growth rate a company can achieve without raising external equity or increasing financial leverage:

$$\text{Sustainable Growth Rate (SGR)} = \text{Retention Ratio } (b) \times \text{Return on Equity (ROE)}$$

Interpreting High vs. Low Retention Ratios

A high retention ratio (close to 100%) is typical of early-stage, tech, or high-growth companies that reinvest every dollar of earnings to accelerate expansion. A low retention ratio indicates that a company prioritizes returning capital to shareholders through dividends, characteristic of mature businesses with steady cash flows.

Calculate corporate accumulated profits with our Retained Earnings Calculator and Residual Income Calculator.