Retention ratio (plowback)
Principles of Finance glossary · Cost of Capital & Capital Structure
Definition
The fraction of earnings retained rather than paid as dividends: b = 1 - payout ratio. Drives the sustainable and internal growth rates.
Retention ratio (plowback) in plain English
When a company earns a profit, it faces a choice: hand the money to shareholders as a dividend (a cash payout), or keep it inside the business to grow. The retention ratio, also called plowback, is the slice it keeps — if it pays out 30% and keeps 70%, then b = 1 - 0.30 = 0.70. It's like getting allowance and deciding how much to reinvest in your side hustle instead of spending it. The more a healthy company plows back, the faster it can grow using its own money, which is why this ratio drives a firm's "sustainable" growth rate.
Also called: plowback
Practice Retention ratio (plowback)
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