Payout ratio
Principles of Finance glossary · Cost of Capital & Capital Structure
Definition
Dividends divided by earnings.
Payout ratio in plain English
When a company earns a profit, it faces a choice: hand some of that money back to shareholders as a cash "dividend," or keep it to grow the business. The payout ratio just measures how much it chose to hand out — divide the total dividends by the total earnings (profit). If a company earned $100 and paid out $40 in dividends, its payout ratio is 40%. Think of it like your paycheck: if you get $100 and spend $40 on treats while saving $60, your "treat ratio" is 40% — a high payout means generous today, a low one means the company is reinvesting for tomorrow.
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