All you need to know about the plowback ratio

If the dividend ratio is 20 per cent of net profits, then the plowback ratio will logically be 80 per cent.

Ploughing back profits is the exact opposite of paying out dividends. When a company makes net profits, a portion of the net profits is paid out to the shareholders in the form of dividends. After the dividends are paid, the residual profits are transferred to the reserves and surplus in the balance sheet of the company and the equity of the company goes up proportionately. Such free reserves can be used at a future date to reward shareholders with bonus shares, which is a common practice. If the dividend ratio is 20 per cent of net profits, then the plowback