The retention ratio occasionally referred to as the plow back ratio, is a monetary metric that increases the number of earnings or benefits which are added into retained earnings at the conclusion of the year. To put it differently, the retention rate is the proportion of benefits that are held by the business rather than distributed as returns at the close of the year.
Definition: What Does Retention Ratio Mean?
This is an important dimension since it reveals how many a business is reinvesting in its own operations. With no continuous reinvestment rate, business growth will be wholly determined by funding from shareholders and lenders.
In ways that the retention ratio is that the reverse of the dividend payout ratio because it reveals how much cash the provider chooses to maintain its bank accounts; whereas, the dividend payout ratio calculates the proportion of benefits a firm opt to spread to its shareholders. Even the plow back ratio raises retained earnings while the volatility ratio declines retained earnings.
The retention rate is figured by subtracting the dividends distributed throughout the interval from the internet earnings and dividing the difference by the internet earnings for the entire year.