When a company reaps a profit, it can either retain the earnings to use for expanding the business, or it can pay them out to shareholders through dividend payments. The percentage of earnings the company retains can give you an indication of the stage the company is at in its growth cycle. Young and developing companies often retain more earnings to use for expansion, while entrenched companies typically pay out more in dividends because they need fewer opportunities for expansion.
1. Subtract the company's preferred dividends paid from the company's net profit for the year to find the company's net earnings for common shares. For example, if a company has $120 million in earnings and pays $7 million in preferred stock dividends, the company has $113 million available to common shareholders.
2. Divide the earnings available to common shareholders by the number of outstanding common shares to find the earnings per share. In this example, if the company has 5.1 million common shares outstanding, divide $113 million by 5.1 million to get $22.16 in earnings per share.
3. Subtract the dividends paid per share from the earnings per share to find the retained earnings per share. Continuing with the example from the previous step, if the company paid $13.78 in dividends, subtract $13.78 from $22.16 to find the company retained $8.38 in earnings per share.
4. Divide the retained earnings per share by the total earnings per share. In this example, divide $8.38 by $22.16 to get 0.3782.
5. Multiply the result by 100 to find the the percentage of earnings retained. In this example, multiply 0.3782 to get 37.82 percent.
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