Retention Ratio (Plowback Ratio)
The proportion of net income reinvested back into the business rather than paid as dividends.
What is Retention Ratio?
The Retention Ratio (also called the Plowback Ratio) is the complement of the Payout Ratio — it measures the share of net income kept by the company for reinvestment rather than distributed as dividends. A retention ratio of 0.75 means 75% of earnings are reinvested. High retention ratios are typical of growth companies that need capital to fund expansion. Together with ROE, the retention ratio drives the Sustainable Growth Rate, making it a fundamental input in dividend discount models.
Formula
Retention Ratio = 1 − Payout Ratio
Worked Example
Worked example — Microsoft Corp. (MSFT)
FY2024
Step 1 Payout ratio (dividends ÷ net income): 24.70%
Step 2 Retention Ratio = 1 − 24.70% = 75.30%
Step 3 → Microsoft retains 75% of its earnings for share buybacks, R&D, acquisitions, and operations
Source: Microsoft 10-K FY2024 (2024-07-30)
Calculate Retention Ratio
Dividends ÷ Net Income × 100 (e.g. 24.70 for 24.70%)
Retention Ratio
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Not investment advice.
How to Interpret Retention Ratio
< 25
Low retention — income-focused, most profits distributed
25 – 50
Balanced — moderate reinvestment and income distribution
50 – 80
High — growth-focused, significant capital reinvestment
> 80
Very High — nearly all earnings reinvested, minimal dividend
📚 Income Investing — Complete the path
- Dividend Yield
- FCF Yield
- Retention Ratio
- Sustainable Growth Rate
- PEG Ratio