Plowback Ratio Definition
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%.
A Little More on What is Plowback Ratio
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.