Payout ratio

A ratio compares two figures to reveal something neither number shows on its own. The payout ratio compares how much of a company's profit is paid out to shareholders as dividends against how much is kept inside the business.

The payout ratio divides total dividends paid by net income, expressed as a percentage. It shows what share of each dollar of profit is distributed to shareholders rather than reinvested or held as cash.

The formula is: Total dividends paid / Net income x 100.

A high payout ratio can signal a mature, stable business with limited reinvestment opportunities, returning most of its profit directly to shareholders. A low payout ratio suggests the company believes it can generate better returns by reinvesting the cash itself, common for younger companies or ones still growing quickly. A payout ratio above 100% means a company is paying out more in dividends than it earned in profit that period, which cannot continue indefinitely without funding the gap through cash reserves or debt.