The plowback ratio, also known as the retention rate, represents the percentage of earnings that have not been paid out as dividends to shareholders. This portion is either reinvested into the business or reserved for large purchases or to pay off liabilities. Depending on the type of business, a high plowback ratio may be good if the company is growing. A lower ratio indicates the company is giving back to the investors by paying out more dividends. The plowback ratio can be calculated by subtracting the dividend payout ratio from 100.
Determine what the dividend per equity share and earnings per share are. For example, the dividend per equity share is quoted as 0.32 in Yahoo Finance for Hewlett-Packard (HPQ) and earnings per share is 3.10 on June 12, 2009 (see Resources).
Divide the dividend per equity share by the earnings per share. Multiply by 100 to get a percentage. This is the dividend payout ratio. In our example, Hewlett-Packard’s dividend ratio is approximately 10 percent ((0.32/3.10) x 100).
Subtract the dividend payout ratio from 100 to get the plowback ratio. Hewlett-Packard’s retention rate is approximately 90 percent (100 percent -10 percent).