How a company splits its earnings
Every dollar of profit a company earns goes one of two places: out the door to shareholders as dividends, or back into the business as retained earnings. The retention ratio measures the second piece — the portion the company keeps — while the dividend payout ratio measures the first. Because every dollar must go to one or the other, the two ratios are mirror images that always add up to the whole. Reading the retention ratio tells you at a glance how self-funded a company’s growth is, and how much of its success it is choosing to reinvest rather than hand back.
The retention ratio formula
Retention ratio = (Net income − Dividends) ÷ Net income
= 1 − Dividend payout ratio
where net income is total earnings for the period anddividends is the amount paid out to shareholders. The numerator, net income minus dividends, is simply retained earnings. Because retention and payout split the same profit, they always sum to 100%.
What makes this calculator different
- Retention and payout, side by side. It shows both ratios at once and makes the relationship explicit — they always add to 100%, so you see the full picture of how earnings are split.
- Retained earnings in dollars. Beyond the percentage, it surfaces the actual dollar amount of profit being plowed back, so the ratio connects to a real figure you can reconcile to the financials.
- It links retention to growth. Retained earnings fund internally financed expansion, so the same number flows straight into thesustainable growth rate calculatorvia SGR = ROE × retention ratio.
Frequently asked questions
What is the retention ratio?+
The retention ratio — also called the plowback ratio — is the share of a company’s net income that it keeps and reinvests in the business rather than distributing to shareholders as dividends. It is calculated as (net income − dividends) ÷ net income, which is equivalent to retained earnings divided by net income. A retention ratio of 0.70 means the company plows 70% of its profits back into operations and pays out the remaining 30%. It is one of the most direct signals of how a firm chooses to fund its own growth.
How does the retention ratio relate to the dividend payout ratio?+
They are two sides of the same coin and always sum to 100%. The dividend payout ratio is the fraction of earnings paid out as dividends, while the retention ratio is the fraction kept. So the retention ratio equals exactly one minus the payout ratio: if a company pays out 40% of earnings, it retains 60%. Knowing either one immediately tells you the other, which is why this calculator displays both together.
Why do growth companies retain more of their earnings?+
Younger, fast-growing companies typically have many profitable projects to fund — new products, capacity, acquisitions, and market expansion — so they reinvest most or all of their earnings rather than paying dividends. A high retention ratio lets them finance that expansion internally without raising as much outside capital. Mature companies, by contrast, often run out of high-return projects and return more cash to shareholders, producing a lower retention ratio and a higher payout.
How does retention drive a company’s growth?+
Retained earnings are the fuel for internally financed growth. The sustainable growth rate (SGR) — the pace a firm can grow without issuing new equity or changing its leverage — is the product of return on equity and the retention ratio: SGR = ROE × retention ratio. Hold ROE constant and a higher retention ratio means a higher sustainable growth rate, because more profit is being reinvested at that return. This is why retention is central to growth analysis rather than just dividend policy.
Is a high or low retention ratio better?+
Neither is inherently better — it depends entirely on what the company can do with the money. A high retention ratio creates value only if the firm can reinvest those earnings at an attractive rate of return; if it cannot, retaining cash destroys value and shareholders would be better served by dividends or buybacks. A low retention ratio suits a mature firm with few growth opportunities. The right level is the one that matches the company’s available high-return investments.
Disclaimer: This calculator is foreducation and illustration only. The retention ratio is a single accounting metric and says nothing on its own about whether reinvested earnings are being deployed well; it should be read alongside a company’s returns and growth opportunities. Nothing here is investment, tax, or financial advice.