Plowback (retention) ratio.
In plain English
The plowback ratio is the mirror image of the payout ratio: one minus the fraction paid out as dividends. If a company pays out 30 percent of earnings, it plows back 70 percent. That retained money funds new equipment, research, acquisitions, or simply sits as cash. Retention only creates value if the company can earn a decent return on what it keeps, which is why plowback is usually read next to return on equity. A company retaining almost everything while earning weak returns is holding its owners' money without putting it to work.
01Why it matters
Every dollar a company keeps is a dollar it decided not to send you, so the question is whether the business can do more with it than you could.
02The math, step by step
A company earns $4.00 per share and pays $1.40 in dividends, a 35 percent payout. The plowback ratio is 100 percent minus 35 percent, or 65 percent, meaning $2.60 per share stays inside the business.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Retained earnings is a cumulative balance sheet total built up over the company's whole life. The plowback ratio is a single-period percentage. A company can have a large retained earnings balance and a plowback ratio of zero this year.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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