what is the retention ratio 
the retention ratio is the proportion of earnings kept back in the business as retained earnings the retention ratio refers to the percentage of net income that is retained to grow the business rather than being paid out as dividends it is the opposite of the payout ratio which measures the percentage of profit paid out to shareholders as dividends the retention ratio is also called the plowback ratio investopedia ryan oakleyunderstanding the retention ratiocompanies that make a profit at the end of a fiscal period can use the funds for a number of purposes the company s management can pay the profit to shareholders as dividends they can retain it to reinvest in the business for growth or they can do some combination of both the portion of the profit that a company chooses to retain or save for later use is called retained earnings retained earnings is the amount of net income left over for the business after it has paid out dividends to its shareholders a business generates earnings that can be positive profits or negative losses retained earnings are similar to a savings account because it s the cumulative collection of profit that s retained or not paid out to shareholders profit can also be reinvested back into the company for growth purposes the retention ratio helps investors determine how much money a company is keeping to reinvest in the company s operation if a company pays all of its retained earnings out as dividends or does not reinvest back into the business earnings growth might suffer also a company that is not using its retained earnings effectively has an increased likelihood of taking on additional debt or issuing new equity shares to finance growth as a result the retention ratio helps investors determine a company s reinvestment rate however companies that hoard too much profit might not be using their cash effectively and might be better off had the money been invested in new equipment technology or expanding product lines new companies typically don t pay dividends since they re still growing and need the capital to finance growth however established companies usually pay a portion of their retained earnings out as dividends while also reinvesting a portion back into the company 