Retention Ratio Calculator
Print| Retained Earnings Addition | $0.00 |
When a corporation generates net profit, management faces a fundamental capital allocation decision: distribute cash to shareholders as dividends or retain the cash within the company to fund research, capital expenditures, or debt reduction. The percentage of net income retained to fund future business expansion is the Retention Ratio (also called the Plowback Ratio).
Our free Retention Ratio Calculator computes the exact earnings retention percentage, plowback rate, and resulting Sustainable Growth Rate (SGR) for corporate equity.
How to Calculate the Retention Ratio & Sustainable Growth Rate
The Retention Ratio is the mathematical inverse of the Dividend Payout Ratio.
Retention Ratio Formula (Inverse Payout):
Retention Ratio (%) = 100% - Dividend Payout Ratio (%)
Retention Ratio Formula (Direct Net Income):
Retention Ratio = ( Net Income - Total Dividends Paid ) / Net Income
Sustainable Growth Rate (SGR) Formula:
Sustainable Growth Rate (SGR) = Retention Ratio × Return on Equity (ROE)
Step-by-Step Corporate Growth Example
Suppose a firm reports Earnings Per Share (EPS) of $5.00 and pays an annual Dividend Per Share (DPS) of $1.50. The company maintains a Return on Equity (ROE) of 15.0%.
Let’s calculate the Dividend Payout Ratio, Retention Ratio, and Sustainable Growth Rate:
Dividend Payout Ratio = ($1.50 / $5.00) × 100 = 30.0%
Retention Ratio (b) = 100.0% - 30.0% = 70.0% (0.70)
Retained Capital Per Share = $5.00 - $1.50 = $3.50 per share
Sustainable Growth Rate (SGR) = 0.70 × 15.0% = 10.50% per year
| Earnings Allocation Metric | Per-Share Dollar Amount | Percentage Share | Strategic Business Function |
|---|---|---|---|
| Total Net Earnings (EPS) | $5.00 / share | 100.0% | Total annual net income pool |
| Distributed Dividends (DPS) | $1.50 / share | 30.0% | Cash return to shareholders |
| Retained Earnings (Plowback) | $3.50 / share | 70.0% Retention | Reinvested into corporate growth |
| Sustainable Growth Rate (SGR) | 70% Retained × 15% ROE | — | 10.50% Annual Expansion Cap |
Frequently Asked Questions (FAQ)
What is the Retention Ratio (Plowback Ratio)?
The Retention Ratio (or Plowback Ratio) is the proportion of net earnings retained within a business rather than paid out as cash dividends to stockholders.
Why do fast-growing tech companies have a 100% Retention Ratio?
High-growth technology companies typically have a 100% Retention Ratio (0% Payout Ratio) because they have high-return investment opportunities. Reinvesting 100% of profits back into R&D and market expansion creates far greater long-term value for shareholders than paying out cash dividends.
How does the Retention Ratio influence the Sustainable Growth Rate?
The Sustainable Growth Rate (SGR) defines the maximum annual sales growth a firm can achieve without taking on additional financial leverage or issuing new equity. Multiplying the Retention Ratio by Return on Equity (ROE) determines this maximum internal growth ceiling.