earnings retention ratio

Earnings retention ratio

Earnings Retention Ratio

The percentage of a publicly-traded company's post-tax earnings that are not paid in dividends. Most earnings retained are re-invested into the company's operations. Tracking year-on-year earnings retention ratios is important to fundamental analysis to investigate whether a company is increasing or decreasing its rate of re-investment. The earnings retentions ratio is calculated thusly:

Earnings retention ratio = (Net income - dividends) / Net income

For example, a company with a net income of $10 million that pays out $3.5 million in dividends has an earnings retention ratio of (10 million - 3.5 million) / 10 million = 65%. It is also called simply the retention ratio.

earnings retention ratio

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For public companies, the effect on the dividend payout ratio, the earnings retention ratio, and the retained earnings to total assets ratio may be substantial.
For each of the three payout ratios, there is a counterpart dividend coverage ratio and an earnings retention ratio.
Again, for each of the three payout ratios, there is a counterpart dividend coverage ratio and an earnings retention ratio.
Accordingly, under the parent company theory, the dividend payout ratio is zero, as indicated in Panel A of Exhibit 9, and the earnings retention ratio is 100 percent.
How income, dividends, and opening and closing balances are reported in the consolidated retained earnings statement may significantly impact dividend payout ratios, dividend coverage ratios, earnings retention ratios, and retained earnings to total assets ratios.
When a single legal corporation has preferred and common stock outstanding, three sets of dividend payout, dividend retention, and earnings retention ratios may be computed for different purposes.