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REINVESTMENT RATE

Description: The manager of a business must be prudent in determining how much of the company's cash flow to return to investors as dividends, and how much to reinvest in the business. This is a balancing act of ensuring that funds are directed toward those areas of the business that will at least earn the company's cost of capital while still keeping investors happy with an adequate payout to them. While it is not possible to measure the ability of a business to invest in the right activities, it is possible to determine at an aggregate level the proportion of cash being reinvested in the business. To do this, we use the reinvestment rate, which quantifies the percentage of cash flow being reinvested in the business.

Formula: In the numerator, add together for the measurement period the cash spent on all capital expenditures, acquisitions, research and development, and other investments in the business. In the denominator, enter for the measurement period the total amount of earnings before interest, taxes, depreciation, and amortization (EBITDA). The formula is:


  

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