Retention ratio

A ratio compares two figures to reveal something neither number shows on its own. The retention ratio compares how much of a company's profit is kept inside the business against how much is paid out, the mirror image of the payout ratio.

The retention ratio is the percentage of a company's net income that it keeps and reinvests in the business rather than paying out to shareholders as dividends. It is the direct complement of the payout ratio, the two always add up to one hundred percent.

The formula is:

A high retention ratio means a company is reinvesting most of its profits, which can be a good sign if that capital is deployed at a strong rate of return, or a poor sign if it is not, since retained capital that fails to generate a solid return would arguably have been better off returned to shareholders as a dividend instead.