Retention Rate (Plowback Ratio)
Retention rate (also known as plowback ratio) is the ratio of earnings for the year retained to total earnings for the period. It is a measure of how much of the total earnings for a period a company is reinvesting as compared with paying out to shareholders.
|Retention Rate =||Earnings Retained|
Retention rate can also be calculated as 1 minus payout ratio.
Companies normally retain a portion of earnings for future profitable capital expenditures. Retention rate tells the degree of such retention. Higher the retention rate higher will be the company's sustainable growth rate and higher share price.
Zeta Ltd. earned an EPS of $2 in FY 2011 when it paid $1 per share as dividends. Find its retention rate.
Retention Rate = 1 − payout ratio = 1 − $1 / $2 = 1 − 50% = 50%
Written by Obaidullah Jan