What is “plow back”?
Depending on the source, “plow back” is defined as either:
- retained earnings, which can be calculated by taking a company’s net income and subtracting the earnings distributed as dividends
- the act of reinvesting net income into the business rather than paying it to shareholders as dividends
In both definitions, plow back refers to investing money back into the business. The first definition simply defines “plow back” as a noun that is synonymous with retained earnings.
The second definition defines “plow back” as a verb that indicates a company is retaining all or most of its earnings rather than paying dividends. For example, “corporation X is plowing back strong second quarter results into its new product line.”
What is the plowback ratio?
The plowback ratio draws upon the definition of plow back as synonymous with retained earnings. Theplowback ratio is simply the ratio of retained earnings to net income. A higher plowback ratio indicates that more money is being put into the business rather than being paid out as dividends.
The plowback ratio is more commonly called the “retention rate” or “retention ratio.”
How do you calculate the plowback ratio?
It is calculated by subtracting dividends from net income, thus calculating retained earnings, and dividing this figure by net income.
For instance, if net income is $10 million and dividends are $5 million, the retention ratio is 0.5 [ ($10 million – $5 million) / $10 million = 0.5].