Definition
The plowback ratio (also called the retention ratio) measures what fraction of a company's net profit it keeps and reinvests, rather than paying out as dividends. It's the mirror image of the dividend payout ratio.
Formula
Plowback Ratio = 1 − Payout Ratio
Payout Ratio = Dividends per share ÷ Earnings per share
Alternative calculation
Plowback Ratio = (Net Income − Dividends) ÷ Net Income
Both formulas give the same result. Use whichever data you have.
Why it matters: the sustainable growth rate
Sustainable Growth = ROE × Plowback Ratio
A company with 15% ROE and 60% plowback can grow at 9% per year without raising new capital. This is the growth rate used as a sanity check in dividend and DCF models.
Worked example
Worked example: CSL Limited (CSL.AX)
Earnings per share$7.30
Dividends per share$3.20
Payout Ratio = $3.20 ÷ $7.3043.8%
Plowback Ratio = 1 − 0.43856.2%
ROE19.5%
Sustainable Growth = 19.5% × 56.2%11.0%
CSL retains 56% of earnings and earns a 19.5% return on equity, implying it can sustainably grow at ~11% per year without needing to issue new shares or take on more debt.