Plowback refers to a company reinvesting its profits back into the company to finance growth as opposed to distributing its profit as dividends or bonuses. Evaluating a company's plowback ratio is an important part of the due diligence process that potential buyers of a company must include in their evaluation of any business. The ratio is 100% for corporations that do not pay dividends and is zero for companies that payout their entire net income as dividends. Companies that want to grow, often have plowback ratios that are very high.

Growth Company

A growth company is a company that generates substantial cash flow, but pays no dividends or distributions to the owners, instead opting to reinvest all cash ftow back into the company in order to maximize the growth of the company and future profits. A growth company tends to have very profitable investment opportunities for its core retained earnings. Growth .companies are often referred to as Gazelle Companies.

Distribution of Dividends to Shareholders or Distribution of Interest to Bondholders

There are advantages and disadvantages to paying dividends to shareholders as opposed to paying interest to bondholders. Paying dividends to shareholders results in double taxation. The corporation pays tax on its income and then shareholders pay tax on dividends received. Paying out interest to bondholders is a deductible expense while bondholders pay taxes on interest received. Whether to distribute dividends to shareholders or pay interest to bondholders is a decision every board of directors must make.

Restricted Corporate Stock