The formula to calculate the Retention Ratio (RR) is:
RR=(NI−D)NI
Where:
A retention ratio refers to the proportion of a company’s earnings that are retained and reinvested into the business rather than being paid out as dividends to shareholders. This ratio provides insight into how much of the profits a company generates are being plowed back into the business for growth and expansion.
Consider an example where:
Using the formula to calculate the Retention Ratio:
RR=(100,000−20,000)100,000=0.8 or 80%
This means that the retention ratio for this example is 80%.