About Retention Ratio Calculator (Formula)
The Retention Ratio Calculator is a financial tool used to calculate the proportion of earnings retained by a company after paying dividends to shareholders. It’s crucial for investors and financial analysts to assess how much of a company’s earnings are reinvested for growth and expansion.
The formula for calculating the retention ratio involves subtracting the dividend per share from the earnings per share and dividing the result by the earnings per share.
The formula for retention ratio is:
Retention Ratio = (Earnings per Share – Dividends per Share) / Earnings per Share
Let’s explain each component of the formula:
- Retention Ratio: This represents the proportion of earnings that a company retains after paying dividends to shareholders. It is typically expressed as a decimal or percentage.
- Earnings per Share: The company’s earnings divided by the number of outstanding shares. It indicates the profitability of each share of stock.
- Dividends per Share: The dividends paid to shareholders divided by the number of outstanding shares. It represents the amount of money distributed to shareholders.
The Retention Ratio Calculator is crucial for investors and financial analysts to understand a company’s dividend policy and its reinvestment strategy for future growth.
Using the calculator, stakeholders can evaluate how much of a company’s earnings are reinvested back into the business, which can provide insights into the company’s potential for future expansion and shareholder value creation.
It’s important to note that a higher retention ratio indicates that the company is reinvesting a larger portion of its earnings, potentially for research and development, acquisitions, or other growth initiatives.