What is Retention Ratio (Plowback Ratio)?
The retention ratio is the share of net income a company keeps inside the business instead of paying out as dividends. It funds the next year’s growth — capex, working capital, acquisitions — and is the mirror image of the dividend payout ratio.
How It Works
- Formula: Retention ratio = 1 − Dividend payout ratio
- Also equal to retained earnings / net income
- Combined with ROE it gives the sustainable growth rate
- High retention typical of growth companies; low retention typical of mature businesses
- Watched together with capex and ROIC to assess reinvestment quality
Saudi Context
Saudi growth-stage and Vision 2030-aligned companies — tech, healthcare, tourism — typically run high retention ratios to fund expansion. Mature dividend payers (banks, telcos) keep retention low. CMA disclosures include both ratios in the annual report.
Example
A Saudi healthcare group earns SAR 500M and pays SAR 100M in dividends. Retention ratio = 80%. With ROE of 18%, the sustainable growth rate is 14.4% — comfortably matched to the group’s expansion plan.