Plowback Ratio - Explained
What is a Plowback Ratio?
Written by Jason Gordon
Updated at September 16th, 2021
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Table of Contents
What is a Plowback Ratio?How is a Plowback Ratio Used?Academic Research on Plowback RatioWhat is a Plowback Ratio?
The plowback ratio is a simple metric showing the ratio of earning retained by the company (i.e., not paid out as a dividend) to the total earnings. The formula is as follows: Plowback Ratio = 1 minus Payout Ratio (Earnings Per Share / Dividends Per Share) For example, a company earns $10 per share. It then declares a $6 per share dividend. The dividend payout ratio is 60% and a plowback ratio is 40%.
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How is a Plowback Ratio Used?
Growth-based companies generally do not pay a dividend. That is, the companies seek to achieve growth with any revenue. Thus, the revenue is allocated to growth efforts. In this case the plowback ratio is 100%. Investors purchase stock in these companies under the expectation that the value of the stock will rise - rather than expecting a dividend return. The stock rises under the assumption that increased growth means the company will eventually be in a position to pay a dividend that is representative of its eventual size.