Payout ratio

The payout ratio represents the percentage of a company's profits that it distributes to shareholders as dividends. For example, if a company earns $1 million and pays out $400,000 in dividends, the payout ratio is 40%. It helps investors gauge how much of the company's earnings are being returned and how much is reinvested for growth. A high payout ratio may indicate generous dividends but could also suggest limited reinvestment, while a lower ratio suggests more profits are kept for future expansion. It’s a useful measure of a company's dividend sustainability and financial health.