RETENTION RATIO Meaning and
Definition
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The retention ratio refers to the proportion of net income a company chooses to retain within their business rather than distributing it as dividends to shareholders. It is expressed as a percentage and signifies the percentage of profits that are reinvested back into the company.
To calculate the retention ratio, one needs to subtract the dividend payout from the net income and divide the result by the net income. The resulting figure represents the proportion of net income retained.
The retention ratio is a crucial financial metric as it provides insight into a company's dividend policy and its inclination to reinvest profits into future growth opportunities or fund internal operations. A higher retention ratio indicates that a larger portion of the net income is being retained by the company, while a lower ratio implies a higher dividend payout.
Companies with growth aspirations and expansion plans often have higher retention ratios as they need to retain profits to fund research, development, acquisitions, or capital expenditures. Conversely, companies in mature industries or with stable cash flows may have lower retention ratios as they distribute a larger share of profits to shareholders in the form of dividends.
Investors consider the retention ratio while evaluating a company's ability to generate future growth and its commitment to returning value to shareholders. A balanced retention ratio that aligns with the company's financial goals and strategic objectives is usually deemed favorable.
Common Misspellings for RETENTION RATIO
- eetention ratio
- detention ratio
- fetention ratio
- tetention ratio
- 5etention ratio
- 4etention ratio
- rwtention ratio
- rstention ratio
- rdtention ratio
- rrtention ratio
- r4tention ratio
- r3tention ratio
- rerention ratio
- refention ratio
- regention ratio
- reyention ratio
- re6ention ratio
- re5ention ratio
- retwntion ratio
- retsntion ratio
Etymology of RETENTION RATIO
The term "retention" comes from the Latin word "retentio", which means 'holding back' or 'keeping.' It is derived from the verb "retinere", which means 'to retain' or 'to hold.'
The word "ratio" comes from the Latin word "ratio", meaning 'reckoning,' 'calculation,' or 'reason.' It is derived from the verb "reri", which means 'to think' or 'to reckon.'
Therefore, the etymology of the word "retention ratio" suggests that it refers to a numerical calculation or proportion measuring the act of holding back or keeping something. In various fields, such as finance or human resources, the term "retention ratio" represents the percentage or proportion of a specific entity or value retained or preserved.
