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Plowback Ratio (Formula, Examples) | How to Calculate Plowback Ratio? - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
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by clicking the bell ican friends today we
are going to learn our topic all that's
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called plow back ratio now this
particular ratio is basically an
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indicator of the quantum of the Profit
that has been written in a business
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instead of being paid out to the
investors so it it is also referred to
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as the retention ratio also or you can
you can call as plow back and
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generally it represents you know the
portion of the retained earnings the
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that that has been you know which could
have been distributed in the form of
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dividends like for instance a form is
having a plow back of let's say a 1.5%
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it indicates very less or no dividend
has been paid and most the profits have
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been retained for the business
expansion now what we know to from the
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what we note from this above graph which
shows Amazon Colgate and we have Google
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we see that Amazon Google have a
plow back ratio of 100% and they retain
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100% of the profit for reinvestment
whereas you know if you see for Colgate
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Colgate's plow back is just standing
at 38.22% in 2016 so let's understand
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the plow back formula the ratio which is
a exactly the opposite of the dividend
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payout ratio so the you can say the plow
back ratio can be computed something
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like this is equal to your annual
dividend or share divided by your
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earning per share so this is going to be
your formula for your annual for your
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plow back ratio now let's assume that
company A reported its earning per share
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at $10 and decided to pay a dividend of
2 so you can say this is your EPS this
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is your dividend
and with the above plow back ratio
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formula the dividend payout ratio for
the above case is going to be the
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dividend payout ratio is going to be is
equal to 2/10 that's going to be 20% so
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20% is your dividend payout ratio and if
you want the plow back ratio then you
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just need to do 1 minus 1 minus 20%
which is going to be your 80% this means
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that company a distributed how much to
20% of its income in the dividend
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and reinvested rest back in the company
that is 80% of the money that wasn't
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Plow back in the company so this is
going 80% is going to be a Plow back now
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this plow back ratio indicates how much
the profit is is getting reinvested
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towards the development of the company
instead of distributing them as a return
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to the investors so you can say that you
know hire the plow back ratio hire the
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PBR followed by the fast growing and
dynamic business which has which have a
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belief of supportable economic
conditions and persistent high growth
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period and the mature business if you
considered the mature businesses they
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are generally adopt a lower level of
plow back ratio that indicates a
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sufficient level of the cash holding and
the sustainable business growth
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opportunities now what exactly is the
impact of the plow back ratio see the
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size of the you can say if this the size
of the plow back ratio will attract
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different types of customers and
investors now investors which are income
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oriented and would expect basically a
lower PBR
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you can see a lower low back ratio as
basically this suggests the high
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dividend possibility and to the to the
shareholders then there are growth
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oriented investors will prefer basically
you can see high
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blowback ratio high PBR that basically
implying that the business of the form
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has profitable internal users of his
earning and which will push up the stock
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prices so you can say the stock price
will actually increase know when the
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plow back ratio if it is close enough to
zero percent there is a large
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possibility that the firm would be
unable to maintain the current level of
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the dividend distribution dividend
distribution so you can say that all the
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written it is distributing all the
returns back to its investor does the
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sufficient cash is not available to
support the capital requirement of the
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business know one of the one of the key
issues with the plow back is that the
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EPS the earning per share do not
necessarily match with the cash flow
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per share so that the amount of the cash
available to be paid out as a dividend
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does not always match the amount of the
earnings so basically this indicates
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that the BOD the Board of Directors
may not always have the cash available
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to pay the dividends now that's a
questionable thing and that is indicated
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by the EPS figures one should basically
note that the choice one should note
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that the choice of the accounting method
can also have an impact of the dividend
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payout ratio and does the plow back
ratio as well so for instance the
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depreciation depth method followed by
the form can have an overall impact and
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SLM method if you considered records
more amount of the depreciation as
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compared to the reducing balance method
which does not have overall impact on
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the dividend ratios and and and usually
low plow back over time can foreshadow a
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cut in the dividends when the company
encounters a need for the cash but let's
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consider another example taking a
comparison of the two companies with the
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help of the plow back ratio formula for
better understanding
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let's say there's a company a and this
company B it has some data like this it
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has earning per share standing at 3.5%
8.5 per share
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they have dividend paid during the year
per share is standing at 3 and 1.5 per
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share they belong to a different
industry which is let's say this is
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belonging to utilities and the B belongs
to tech industry and the net cash flow
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the net cash flow from the investment
activity let's say this is negative and
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this one is positive let's try and
calculate an answer the plow back or for
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the PBR ratio the plow back ratio of
form a which is going to be your
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dividend divided by your earning per
share and do control R make it a
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percentage form so we have 86% as
the plow back ratio for a and that a B
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is 18% so the plow back ratio of
Company A let's keep this as positive
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and negative the plow back off company a
suggest that they have been struggling
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to and to find any profitable
opportunities perhaps the form does not
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have many opportunities at this very
moment because of the 86% and
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those will be distributing a reasonable
portion which is your forum portion of
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the earnings as dividend and this could
be a temporary tactic to keep a current
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lot of shareholders satisfied and
enhance the stock price for the
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immediate future but when we talk about
be a lower plow back and and a
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negative cash flow highlights that the
fact that they have been heavily
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investing and the futuristic projects
and perhaps maybe may have retained
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sufficient earnings for the future
opportunities so this can be two of the
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reason now this is the example of Apple
which have taken you know this is a
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practical example to understand the plow
back ratio of apple company Apple Inc we
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all are using the iPhones and iPad and
Mac so how about to take some real exam
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real life example over here we have
dividend which is which is over here
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from 2012 we have a dividend here which
is from 2012, 2016
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the net income that dividend payout ratio
is here and the plow back ratio is here
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so what we note here that until 2011
Apple didn't be any dividend as you can
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see 2.49 it's just started to its
investor and the plow back ratio was
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100% because they believed if
they would have it reinvest the earnings
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they would be able to generate better
returns for the investor which did which
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they did eventually however they started
reducing the plow back and as you can
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see the plow back ratio is reducing from
2012 onwards and Apple has been
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maintaining a retention ratio of in the
in the in the neighborhood of 70 to 75%
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in the range in the past 4
years so that's it for this particular
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