Reinvestment Rate Calculation

Reinvestment Rate Calculator

Measure how much profit a business plows back into operations

Calculated Reinvestment Rate
0.00%

Understanding the Reinvestment Rate

The reinvestment rate is a critical metric used in fundamental analysis to determine how much of a company's earnings are being directed back into the business to generate future growth. Unlike the retention ratio (which focuses purely on dividends), the reinvestment rate looks at tangible investments in assets and working capital.

How to Calculate Reinvestment Rate

The formula used in this calculator focuses on "Net Reinvestment" relative to "Net Income":

Reinvestment Rate = (Net CapEx + Change in Working Capital) / Net Income

*Net CapEx = Capital Expenditures – Depreciation

Real-World Example

Imagine a manufacturing firm with the following annual data:

  • Net Income: $1,000,000
  • Capital Expenditures: $400,000 (New machinery)
  • Depreciation: $150,000
  • Change in Working Capital: $50,000 (Increase in inventory/receivables)

Calculation:
Net CapEx = $400,000 – $150,000 = $250,000
Total Reinvestment = $250,000 + $50,000 = $300,000
Reinvestment Rate: $300,000 / $1,000,000 = 30%

Why This Matters for Investors

A high reinvestment rate combined with a high Return on Capital (ROC) typically signals a company with strong growth potential. If a company reinvests 50% of its income and earns a 20% return on that capital, its expected growth rate in operating income would be 10% (50% * 20%). Conversely, a low reinvestment rate might suggest a mature company that prefers returning cash to shareholders via dividends or buybacks.

function calculateReinvestmentRate() { var netIncome = parseFloat(document.getElementById('netIncome').value); var capEx = parseFloat(document.getElementById('capEx').value); var depreciation = parseFloat(document.getElementById('depreciation').value); var workingCap = parseFloat(document.getElementById('workingCap').value); var resultDiv = document.getElementById('resultContainer'); var rateDisplay = document.getElementById('rateResult'); var summaryText = document.getElementById('summaryText'); if (isNaN(netIncome) || isNaN(capEx) || isNaN(depreciation) || isNaN(workingCap)) { alert("Please enter valid numeric values for all fields."); return; } if (netIncome === 0) { alert("Net Income cannot be zero for this calculation."); return; } var netCapEx = capEx – depreciation; var totalReinvestment = netCapEx + workingCap; var reinvestmentRate = (totalReinvestment / netIncome) * 100; rateDisplay.innerHTML = reinvestmentRate.toFixed(2) + "%"; resultDiv.style.display = "block"; var interpretation = ""; if (reinvestmentRate > 70) { interpretation = "This is a very high reinvestment rate, typical of aggressive growth companies or capital-intensive industries in expansion phases."; } else if (reinvestmentRate > 30) { interpretation = "This reflects a balanced approach, suggesting the company is actively funding growth while maintaining profitability."; } else if (reinvestmentRate > 0) { interpretation = "This is a conservative reinvestment rate, often seen in mature companies that distribute most earnings to shareholders."; } else { interpretation = "A negative reinvestment rate suggests the company is liquidating assets or reducing its operational scale."; } summaryText.innerHTML = "Analysis: " + interpretation + " For every $1.00 of net income, the company is reinvesting $" + (totalReinvestment / netIncome).toFixed(2) + " back into the business."; }

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