What is Plowback Ratio?
The Plowback Ratio is a fundamental and technical metric that determines how so much profit is kept after payouts have been paid out. “Retention Ratio” is the most common name for this ratio.
Understanding Plowback Ratio
By reducing the proportion of yearly dividend payout and earnings per share (EPS) from 1, the plowback ratio is obtained. It may be determined, on either hand, by computing the residual money after calculating the dividend payout rate.
Plowback Ratio = (Net Income − Dividends) / Net Income
Retention ratios show how much profit is spent in the business instead of distributed to shareholders. For example, some investors would prefer low ratio firms' cash dividends while others prefer the capital gains predicted from a company's reinvestment of profits.
Fast-growing firms, which are typically more concentrated on reinvesting capital to build the business, have a smaller plowback ratio than older, more established organizations. As a result, it may be used to detect growing organizations.
Management directly influences the retention ratio since it sets the dollar amount of dividends to issue. Alternatively, the plowback ratio must be calculated using EPS, which is impacted by a firm's accounting system decision. As a result, only a few internal factors significantly impact the retention ratio.
A corporation with $12 EPS and $3 per share has a dividend payout ratio of 25% so, the plowback or retention ratio is (12-3) / 12 = 75%.
- The plowback ratio can be used in conjunction with the dividend yield to determine the industry's long-term plans.