A cash cow is a business or a product that has a large market share in an industry with slow to little growth.  Cash cows usually require little reinvestment of their profits as they are not looking for growth and are only seeking to maintain profits.  The business is given the name cash cow because it is “milked” for its cash.

It is the goal of a business, and especially its marketing department, to transform their business or product into a star or a cash cow.

A cash cow will be found in the bottom left corner of a growth-share matrix where the growth rate is slow and the market share is large.

The plowback ratio is the percentage of earnings reinvested into the firm.  In other words, it is the amount of earnings the firm retains after it has issued dividends.

The size of the plowback ratio is important as the more money a firm retains the more growth a firm can sustain.  A new start-up company will (or should) have a higher plowback ratio as it is seeking to grow.  However, a company that is mature and a “cash cow” will have a lower plowback ratio as it has already passed its stages of large growth.

A new start-up company has many opportunities for new investments and with a solid business model those investments can have high returns.  On the other hand, a mature company will have less investment opportunities with high returns as it has already reached most of its potential.  For a mature company it is often a better idea to payout its earnings to investors so they can invest those earnings in investments with higher returns.

The plowback ratio is simply the inverse of the payout ratio (the percentage of earnings paid out to investors).

Plowback ratio = (earnings - payout)/earnings

The plowback ratio can be used to find the growth rate of a company (which is used in the dividend capitalization model) by multiplying it against the return on equity.