The rate of interest (rate of return) that can be earned when funds are taken out of a specific investment (e.g., a fixed-income security) and redirected (reinvested) into another, irrespective of time horizon. Reinvestment rate may also refer to the rate at which cash flows from an investment (instrument/ product) can be reinvested in another.
In yet another different context, reinvestment rate reflects how much a firm plows back to finance existing and planned operations in order to produce future growth. The reinvestment rate is typically measured using the latest financial statements of a firm (historical reinvestment rate). However, an attempt to infer a future reinvestment rate from a historical rate may not be the right approach, especially in view of the substantial changes that a historical rate may manifest due to fluctuations in a firm’s investment and reinvestment capacity over time. In such situations, using an average reinvestment rate over time may be a better indication of the future. The average historical rates (e.g., industry averages) may also provide a better indication for matured firms, given the substantial expansions made in the past.
