The plowback ratio, also known as the retention ratio, measures the proportion of a company's net profit that is retained within the business for reinvestment — rather than distributed to shareholders as dividends. It is the complement of the dividend payout ratio and is calculated as: Plowback Ratio = 1 – Dividend Payout Ratio, or equivalently, Retained Earnings ÷ Net Profit. A company with a plowback ratio of 0.70 retains 70% of its earnings for internal reinvestment in capital expenditure, R&D, debt repayment, or acquisitions, while distributing the remaining 30% as dividends. High-growth companies in India — particularly in technology, pharmaceuticals, and emerging sectors — typically have high plowback ratios because reinvestment opportunities offer superior returns compared to dividend distributions. The plowback ratio is a critical input in the Gordon Growth Model for stock valuation: Sustainable Growth Rate = Return on Equity × Plowback Ratio, linking a company's dividend policy directly to its long-term earnings growth potential.
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