How is the Retention Ratio calculated?

The retention ratio is calculated by dividing retained earnings by net income. This ratio reflects the proportion of a company's earnings that are retained or reinvested in the business rather than distributed to shareholders as dividends.

To understand this better, consider that retained earnings are the cumulative amount of net income that has been kept in the company instead of being paid out as dividends. By dividing retained earnings by net income, you gain insight into how much of the company's profits are being reinvested back into the company, which is crucial for assessing the growth potential and sustainability of the business.

This retention ratio can provide valuable information to investors and analysts about a company's growth strategy and long-term viability. A higher retention ratio typically indicates a focus on growth, while a lower ratio might suggest that a company is returning more profits to shareholders.