|Earnings retention ratio|
Earnings retention ratio
The earnings retention ratio (ability to keep profits and pay to shareholders) is a way to calculate what the percentage of earnings are returned to shareholders.
To calculate earnings retention ratio = ((earnings per share - dividend per share) / earnings per share)* 100%
By charting historical earnings retention ratios, the trend will show you what the general direction the company is taking in regards to dividends. If the trend is declining, it is paying more shareholders. If the trend is growing, it is using more of the earnings for company expansion/expenses. A value of 100% means the company is not paying any dividends while a value of 0% (which is impossible) would mean the company is paying every cent earned to the shareholders. Smaller companies (or growth stocks) will generate high percentage retention (even 100%), while larger companies (or income stocks) will pay some form of dividend.
To determine what a reasonable ratio is for a company, you should compare companies that are of the same business type and size as the one you are evaluating.