Given here is the retention ratio by payout ratio formula for the retention ratio which is 1 minus the payout ratio. This formula can be rearranged to show that the retention ratio plus payout ratio equals 1, or essentially 100%. That is to say that the amount paid out in dividends plus the amount kept by the company comprises all of net income. The retention ratio is used by growth investors to estimate whether the companies that appear to be plowing money back into their operations.
The retention ratio is also known as the plowback ratio. When the retention ratio is higher, the company believes there are uses for the cash internally that will provide a rate of return higher than the cost of capital. This retention ratio by payout ratio formula is an important formula to be remembered by the stock investors.