retention ratio

(noun)

retained earnings divided by net income

Related Terms

Examples of retention ratio in the following topics:

  • Dividend Payments and Earnings Retention

    • The dividend payout and retention ratios offer insight into how much of a firm's profit is distributed to shareholders versus retained.
    • Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends:
    • These retained earnings can be expressed in the retention ratio.
    • Retention ratio can be found by subtracting the dividend payout ratio from one, or by dividing retained earnings by net income.
    • The dividend payout ratio is equal to dividend payments divided by net income for the same period.

  • The Cost of Retained Earnings

    • Understanding the equation to determine the retention ratio adds some clarification for this point:
    • ${\displaystyle {\mbox{Retention Ratio}={\frac {\mbox{Retained Earnings}}{\mbox{Net Income}}}}={\displaystyle {\mbox{1 - Dividend Payout Ratio}}}}$
    • The dividend payout ratio is a useful addition to the above equation, and is written as:

  • Additional Funds Needed (AFN)

    • RR=the retention ratio from net income (equal to 1 minus the dividend payout ratio; disregard if dividends are not declared).

  • Relationships between ROA, ROE, and Growth

    • Its retention rate is 80%, and its shareholder equity is equal to $1,500,000.
    • We use the value for return on equity, however, in determining a company's sustainable growth rate, which is the maximum growth rate a firm can achieve without issuing new equity or changing its debt-to-equity ratio.
    • Capital intensity can be stated quantitatively as the ratio of the total money value of capital equipment to the total potential output.
    • In other words, changes in the retention or dividend payout ratios can lead to changes in measured capital intensity.
    • Discuss the different uses of the Return on Assets and Return on Assets ratios

  • Assessing Internal Growth and Sustainability

    • Its earnings retention rate is 80%.
    • We find the internal growth rate by dividing net income by the amount of total assets (or finding return on assets) and subtracting the rate of earnings retention.
    • Sustainable growth is defined as the annual percentage of increase in sales that is consistent with a defined financial policy, such as target debt to equity ratio, target dividend payout ratio, target profit margin, or target ratio of total assets to net sales.
    • We find the sustainable growth rate by dividing net income by shareholder equity (or finding return on equity) and subtracting the rate of earnings retention.

  • Total Debt to Total Assets

    • The debt ratio is expressed as Total debt / Total assets.
    • Financial ratios are categorized according to the financial aspect of the business which the ratio measures.
    • Debt ratios measure the firm's ability to repay long-term debt.
    • The higher the ratio, the greater risk will be associated with the firm's operation.
    • Like all financial ratios, a company's debt ratio should be compared with their industry average or other competing firms.

  • Ratio Analysis and EPS

    • Financial ratios are categorized according to the financial aspect of the business which the ratio measures .
    • Acid-test ratio (Quick ratio): (Current assets - Inventory - Prepayments) / Current liabilities
    • Times interest earned ratio (Interest Coverage Ratio): EBIT / Annual interest expense
    • Return on assets (ROA ratio or Du Pont Ratio): Net income / Average total assets
    • Ratio analysis includes profitability ratios, activity (efficiency) ratios, debt ratios, liquidity ratios and market (value) ratios

  • Classification

    • Ratio analysis consists of calculating financial performance using five basic types of ratios: profitability, liquidity, activity, debt, and market.
    • Most analysts think of financial ratios as consisting of five basic types:
    • Activity ratios, also called efficiency ratios, measure the effectiveness of a firm's use of resources, or assets.
    • Market ratios are concerned with shareholder audiences.
    • Classify a financial ratio based on what it measures in a company

  • Current Ratio

    • Current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months.
    • Acid Test - a ratio used to determine the liquidity of a business entity.
    • The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months.
    • This can allow a firm to operate with a low current ratio.
    • If all other things were equal, a creditor, who is expecting to be paid in the next 12 months, would consider a high current ratio to be better than a low current ratio.

  • Selected Financial Ratios and Analyses

    • A publicly traded company's stock price can also be a variable used in the computation of certain ratios, such as the price/earnings ratio.
    • The following are some examples of financial ratios that are used to analyze a company.
    • This ratio indicates the proportion of income that has been realized in cash.
    • As with quality of sales, high levels for this ratio are desirable.
    • Capital Acquisition Ratio = (cash flow from operations - dividends) / cash paid for acquisitions.