What is the formula for calculating the retention ratio?

The retention ratio is a key financial metric that indicates the proportion of net income that is retained in the company rather than being distributed to shareholders as dividends. The formula for calculating the retention ratio is expressed as retained earnings divided by net income.

This calculation shows how much of the profit the company keeps to reinvest in growth or to pay off debt, as opposed to what it pays out in dividends. A higher retention ratio suggests that the company is likely reinvesting a larger portion of its earnings, which might be an indicator of growth potential.

By understanding this formula, one can assess a company's strategy regarding whether it prioritizes returning cash to shareholders or reinvesting in business opportunities for future growth. This metric is particularly relevant for evaluating the financial health and long-term sustainability of a business.