Plowback Ratio

What is the 'Plowback Ratio'

The plowback ratio in fundamental analysis measures the amount of earnings retained after dividends have been paid out. It is sometimes referred to as the retention rate. The opposite metric, measuring the amount of dividends that are paid out as a percentage of earnings, is known as the payout ratio.

BREAKING DOWN 'Plowback Ratio'

The plowback ratio is an indicator of how much profit is retained in a business rather than paid out to investors. Younger businesses tend to have higher plowback ratios; these faster-growing companies are more focused on business development. More mature businesses are not as reliant on reinvesting profit to expand operations.

Use of the plowback ratio is most useful when comparing companies within the same industry. Different markets require different utilizations of profit. For example, it is not uncommon for technology companies to have a plowback ratio of 1 (that is, 100%). This indicates that no dividends are issued, and all profits are retained for business growth.

The plowback ratio represents the portion of retained earnings that could potentially be dividends. Higher retention ratios indicate management’s belief of high growth periods and favorable business economic conditions. Lower plowback ratio computations indicate a wariness in future business growth opportunities or satisfaction in current cash holdings.

Plowback Ratio Formula

The plowback ratio is calculated by subtracting 1 from the quotient of the annual dividends per share and earnings per share (EPS). On the other hand, it can be calculated by determining the leftover funds upon calculating the dividend payout ratio. For example, a company that reports $10 of EPS and $2 per share of dividends will have dividend payout ratio of 20% and a plowback ratio of 80%.

Investor Preference

The plowback ratio is a useful metric for determining what companies to invest in. Investors preferring cash distributions avoid companies with high plowback ratios. However, companies with higher plowback ratios have greater chances for incurring capital gains, achieved through appreciated stock prices upon the growth of the organization. Investors seek stable plowback ratio calculations as indicators of current stable decision-making that can help shape future expectations.

Impact From Management

Because management determines the dollar amount of dividends to issue, management directly impacts the plowback ratio. Alternatively, the calculation of the plowback ratio requires the use of EPS, which is influenced by a company’s choice of accounting method. Therefore, the plowback ratio is highly influenced by only a few variables within the organization.

RELATED TERMS
  1. Retention Ratio

    The proportion of earnings kept back in the business as retained ...
  2. Dividend Payout Ratio

    The percentage of earnings paid to shareholders in dividends. ...
  3. Internal Capital Generation Rate ...

    A quantifiable mathematical rate that portrays how quickly a ...
  4. Combined Ratio

    A measure of profitability used by an insurance company to indicate ...
  5. Payout Ratio

    Payout ratio is the proportion of earnings paid out as dividends ...
  6. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ...
Related Articles
  1. Investing

    Corporate Dividend Payouts And the Retention Ratio

    An investor can use dividend payout and retention ratios to gauge an investment’s possible return, and compare it to other stocks.
  2. Investing

    Dividend Ratios: Payout And Retention

    The dividend payout ratio and retention ratio measure how much profit a company gives back to shareholders as dividends. When a business earns money, it must decide whether to use all of its ...
  3. Markets

    4 Ratios to Evaluate Dividend Stocks

    Discover details about fundamental analysis ratios that could help to evaluate dividend paying stocks, and learn how to calculate these ratios.
  4. Markets

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  5. Investing

    Dividend Payout Ratio

    Discover how this ratio can help you determine how well a company's earnings support its dividend payments.
  6. Investing

    Efficiency Ratio

    There are many types of efficiency ratios, but all measure how well a company utilizes its resources to make a profit. Business managers use these ratios to determine how well they are operating ...
  7. Trading

    The Price To Earnings Ratio Explained

    The price to earnings ratio is one of the most important ratios in investing. Find out how it is calculated, how it can be used and what it tells investors about a particular stock.
  8. Trading

    Ratio Analysis

    Ratio analysis is the use of quantitative analysis of financial information in a company’s financial statements. The analysis is done by comparing line items in a company’s financial ...
  9. Investing

    A Guide For Calculating The Dividend Payout Ratio

    Dividends are a significant contributor to total equity returns. That makes dividend payout ratios—which are key indicators of dividend sustainability—doubly important.
  10. Investing

    Financial Ratios to Spot Companies Headed for Bankruptcy

    Obtain information about specific financial ratios investors should monitor to get early warnings about companies potentially headed for bankruptcy.
RELATED FAQS
  1. How do I calculate the dividend payout ratio from an income statement?

    Understand the dividend payout ratio, how it differs from the dividend yield and how it can be calculated from a company's ... Read Answer >>
  2. How do I calculate dividend payout ratio from a balance sheet?

    Understand what the dividend payout ratio indicates and learn how it can be calculated using the figures from a company's ... Read Answer >>
  3. What are some possible red flags in a company's dividend payout ratio?

    Read about how investors and analysts use the dividend payout ratio to scrutinize the sustainability of a company's dividend ... Read Answer >>
  4. What can cause the marginal propensity to consume to change over time?

    Learn about the dividend payout ratio and dividend yield, what the ratios measure and the difference between the dividend ... Read Answer >>
  5. What is the difference between the dividend yield and the dividend payout ratio?

    Learn the differences between a stock's dividend yield and its dividend payout ratio, and learn why the latter might be a ... Read Answer >>
  6. What is the difference between dividend yield and dividend payout ratio?

    Understand the difference between the dividend yield and the dividend payout ratio, two basic investment valuation measures ... Read Answer >>
Hot Definitions
  1. Put Option

    An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security ...
  2. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  3. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  4. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  5. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  6. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
Trading Center