The dividend payout ratio is an important aspect of fundamental analysis, which can be calculated using easy to find data on the company’s financial statements.
The dividend payout ratio indicates investors or analysts, what percentage of the net profit of the company allocated for dividend payments to shareholders. The average coefficient is the opposite of the retention rate that shows what amount of profit the Company keeps to reinvest back into their operations. The dividend payout ratio can be calculated in absolute terms by dividing the total annual dividend payout of net profit, but is more usually calculated per share, in the following order:
The dividend payout ratio = annual dividend per common share ÷ earnings per share
The calculation of the payout ratio can be done by using a common General meeting of shareholders, the performance of equity on the balance sheet of the company. Divide this amount by the current price of the company’s shares to number of shares, and then calculate the dividends per share by dividing the dividend payout amount recorded on the balance sheet by the number of shares issued. Earnings per share (EPS) figure can be found at the bottom of the statement of profit and loss.
The dividend payout ratio is a key ratio of profitability, which allows to evaluate return on investment. To identify what proportion of the net income of the company payments or deductions, it may also serve as metrics to assess the future prospects of the company. The unusually high payout ratios can mean that the company is trying to cover up a bad situation with investors, offering extravagant dividends, or that he just has no plans to actively use its working capital for expansion.
Analysts prefer to see a healthy division between dividends and retained earnings, and they also prefer to see a consistent dividend-payout ratios, which should not be difficult for the company to keep.