What does the retention ratio indicate?

The retention ratio is an important financial metric that indicates the proportion of net income that is retained in the company after dividends have been paid out to shareholders. This ratio helps to understand how much profit is reinvested into the business for growth, expansion, or other purposes, as opposed to being distributed to shareholders.

In essence, if a company has a high retention ratio, it is likely focusing on growth and reinvestment, while a low ratio indicates that a significant portion of income is returned to shareholders, potentially at the expense of future growth. This metric is valuable for investors looking to assess a company's potential for long-term growth based on its income retention strategy.

The other options, while related to corporate finance, do not align with the specific definition of the retention ratio. The proportion of net income paid out as dividends refers to the payout ratio, not the retention ratio. The amount of cash retained for operations could describe cash flow management but does not specifically reflect the retention of net income. Lastly, the proportion of expenses covered by income is more related to profitability and operational efficiency, rather than the concept of income retention.