Reinvestment Rate Calculator
Measure how much profit a business plows back into operations
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":
*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.