Plowback Ratio – Definition

Cite this article as:"Plowback Ratio – Definition," in The Business Professor, updated December 10, 2019, last accessed May 31, 2020, https://thebusinessprofessor.com/lesson/plowback-ratio-definition/.

Back to: ACCOUNTING, TAX, & REPORTING

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.

References for “Plowback Ratio

https://www.investopedia.com › Investing › Financial Analysis

https://ycharts.com/glossary/terms/plowback_ratio

https://www.wallstreetmojo.com › Financial Statement Analysis › Dividend Ratios

https://investinganswers.com/dictionary/p/plowback-ratio

https://www.accountingtools.com/articles/plowback-ratio-definition-and-usage.html

Was this article helpful?