Stock Market Tips-11
Ploughback and reserves
After deduction of all expenses including taxes, the net profits of a company are split into two parts dividends and ploughback. Dividend is that portion of a company's profits which is distributed to its shareholders, whereas ploughback is the portion that the company retains and gets added to its reserves. The figures for ploughback and reserves of any company can be obtained by a cursory glance at its balance sheet and profit and loss account. Most newspapers and business and investment magazines also give this information for prominent companies while reporting their annual working results.
Ploughback is important because it not only increases the reserves of a company but also provides the company with funds required for its growth and expansion. All growth companies maintain a high level of ploughback. So if you are looking for a growth company to invest in, you should examine its ploughback figures. Companies that have no intention of expanding are unlikely to ploughback a large portion of their profits.
Reserves constitute the accumulated retained profits of a company. It is important to compare the size of a company's reserves
with the size of its equity capital. This will indicate whether the company is in a position to issue bonus shares, As a rule of thumb, a company whose reserves are double that of its equity capital should be in a position to make a liberal bonus issue.
Retained profits also belong to the shareholders. This is why reserves are often referred to as shareholders' funds. Therefore, any addition to the reserves of a company will normally lead to a corresponding an increase in the price of your shares. The higher the reserves, the greater will be the value of your shareholding. Retained profits (ploughback) may not come to you in the form of cash, but they benefit you by pushing up, the price of your shares.
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