How to Calculate Retention Rate

Companies that pay out large dividends have lower retention rates.

The retention rate, also know as the plowback ratio, refers to the amount of earnings that a company keeps after it has paid out dividends. The retention rate varies between different types of companies. Developing companies often have a higher retention rate because the company keeps more of its profits to reinvest in the business to help it grow. More mature companies tend to have lower retention rates because they do not have as many opportunities to expand.

Things You'll Need

• Annual report
• Calculator

Instructions

1. Look up the dividends paid per common share and the earnings per share.

2. Subtract the dividends paid per common share from the earnings per share to find the retained earnings per share. For example, if a company had earnings of $5 per share and paid a dividend of $2 per share, you would subtract $2 from $5 to get $3 of retained earnings per share.

3. Divide the retained earnings per share by the earnings per share to calculate the retention rate. In this example, you would divide $3 by $5 to get 0.6, or 60 percent, as the retention rate for the company.

References

• Investopedia: Plowback Ratio
• Investopedia: Cash Flow Indicator Ratios: Dividend Payout Ratio