Posted in Finance, Accounting and Economics Terms, Total Reads: 421
Definition: Plowback Ratio
A fundamental analysis ratio which measures the amount of retained earnings i.e., earnings retained after dividends have been given. This is the opposite of the pay-out ratio that measures the amount of total dividends that were paid out as the percentage of earnings. Plowback Ratio is also known as the "retention ratio", "retention rate", or the "earnings retention ratio".
This ratio is considered higher the better ratio. The higher ratio means that the more earnings a company retains, the more growth it will foster. But the optimum ratio of a ratio depends on the type of the company. The faster a company grows, the more desirable it is be to have a higher plowback ratio. On the other hand with a slow-growing company, an investor will prefer to have a larger payout ratio.
The size of the plowback ratio attracts different types of investors. An income-oriented investor would want to see a lower plowback ratio, since this implies that most earnings are being paid out to investors. Whereas a growth-oriented investor will get attracted to a higher plowback ratio, as this implies that a business has potential to profitable internal uses for its retained earnings that will increase its stock price.
Medicare help the people at a time when they may have major health issues however they lack the funds for treatment. When the plowback ratio gets close to 0%, there is a very high risk that the company will not be able to sustain its current level of dividend distributions, as it is diverting almost all earnings back to their investors. It leaves no cash to support the ongoing capital needs of the business.