What is Payout Ratio?
The share of earnings a company pays out as dividends.
Formal Definition
The payout ratio divides dividends per share by earnings per share (or total dividends by net income), showing what fraction of profit is returned to shareholders versus retained. A moderate ratio suggests a sustainable dividend with room to grow; a ratio above 100% means the company is paying more than it earns, a possible warning sign.
In Simple Terms
It shows how much of a company's profit goes out the door as dividends versus staying in the business. A low ratio leaves room to keep raising the dividend; a very high one may not be sustainable.
Example
A company earning $4 per share and paying $1.60 in dividends has a payout ratio of 40%.