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.

  • 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).

  • The Cost of Retained Earnings

    • Retained earnings can be expressed as a ratio known as the "retention rate. "
    • The retention rate also can be expressed in terms of the dividend payout ratio: .
    • The retention rate and the dividend payout rate are opposites, as are retained earnings and dividends paid out.

  • 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.

  • Scorecard Measurement

    • For example, if managers decide that a balanced scorecard should include performance measurements from the perspective of the "Customer", then they must define particular objectives of success, such as customer retention longevity, repeat sales, or customer willingness to recommend a product or service.
    • For example, financial measures can be defined as discrete values in the context of accounting ratios and continuous values in the context of dollar figures.

  • 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

  • Using the Receivables Turnover Ratio

    • The receivables turnover ratio measures how efficiently a firm uses its assets.
    • The receivables turnover ratio, also called the debtor's turnover ratio, is an accounting measure used to measure how effective a company is in extending credit as well as collecting debts.
    • The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.
    • A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient; in contrast, a low ratio implies the company is not making the timely collection of credit.
    • Sometimes the receivables turnover ratio is expressed as the "days' sales in receivables":

  • Acid Test Ratio

    • The acid-test ratio, also known as the quick ratio, measures the ability of a company to use its near cash or quick assets to immediately extinguish or retire its current liabilities.
    • The acid-test ratio, like other financial ratios, is a test of viability for business entities but does not give a complete picture of a company's health.
    • Generally, the acid test ratio should be 1:1 or higher; however, this varies widely by industry.
    • A low acid-test ratio may be a sign of poor use of cash by a business.
    • The acid-test ratio is similar to the current ratio except the value of inventory is omitted from the calculation.