Retention Ratio
Candlefocus EditorRetention ratio is calculated by dividing the retained earnings by the total net income (revenue minus expenses). This calculation can be done over a specific period – such as a quarter or a year. A higher retention ratio means that the company is able to reinvest more earnings back into its operations and a lower ratio indicates that more earnings are being paid out as dividends to shareholders.
Retention ratio is an important tool for investors to evaluate the prospects of a company. Companies with a higher retention ratio are generally growing at a faster rate as more funds are retained to fund expansion plans. However, too much investment can backfire as it could lead to a reduction in dividends for shareholders. Therefore, investors should use the retention ratio in tandem with other key metrics such as return on investment (ROI) and debt and liquidity ratios when evaluating the financial performance of a company.
Overall, the retention ratio is an essential component for evaluating the financial performance of a company as it provides an indication of the use of retained earnings and of the reinvestment strategies being employed by the company. It is therefore important for investors to keep an eye on this ratio when evaluating a company’s potential.