Each year if a company earns money and has a net income, then it either keeps the money and deposits it into a retained earnings account or pays the money out as a dividend. Investors typically want to see companies pay dividends because they investor makes more money from the dividend. However, sometimes if a company is expanding or needs resources, it will retain the money. Retention rate is the percentage of net income kept by the company and is also known as the retention ratio.
Determine the company's net income for the year. Companies disclose net income on the income statement, usually as the last line on the statement. For example, a company has $800,000 of net income for the year.
Determine the amount of money paid in dividends by the company. Dividends are typically disclosed in the stockholders' equity section or as an expense on the income statement. In our example, the company paid $100,000 of dividends for the year.
Subtract dividends from net income to determine retained income. In our example, $800,000 minus $100,000 equals $700,000 of retained income.
Divide retained income by net income to determine the retention rate. In our example, $700,000 divided by $800,000 equals a retention ratio of 0.0875, or 87.5 percent.
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