The reinvestment rate measures the percentage of a company’s net income that is reinvested in the business. The reinvestment rate is of particular concern to financial managers, since investors generally prefer companies with lower reinvestment rates and more cash flow available to pay out as dividends. For this reason, tracking a company’s reinvestment rate is an important skill for all investors and managers to have.
Things You'll Need
- Audited income statement and cash flow statement
- Microsoft Excel
Enter the company’s net income into Excel. You can find the company’s net income on the final line of the audited income statement.
Enter the company’s capital expenditures into Excel. Capital expenditures represent the funds that must be reinvested into the company to maintain operations and fund future growth. You can find the capital expenditures figure under the “Cash Flow from Investing” section of the audited cash flow statement.
Divide the company’s capital expenditures by the net income to determine the reinvestment rate. For example, if a company has $100,000 in net income and $50,000 in capital expenditures, the reinvestment rate is equal to $50,000/$100,000 = 50%. Stated another way, 50% of the income that the company generates must be redeployed into the business to fund operations.