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Tuesday, 17 January 2012

Financial Ratio Analysis:Payout Ratios

Pay out ratios provides an idea of how well earnings support the dividend payments and the ability to keep profits and pay to share holders.
There are two types of payout Ratios
1.Dividend Payout Ratio: 
  • Investors who are seeking for high current income and limited capital growth prefer companies with high dividend payout ratio.
  • Investors who are seeking capital growth may prefer companies with lower payout Ratio because capital gains are taxed at a lower rate.
  • Some company's chose stock buy back as an alternative to dividends. In such cases this ratio becomes less meaningful.
  •  Dividend ratio is zero in the case of most high growth firms.
  • A stable dividend payout ratio indicates a solid dividend policy by the company's board of directors. 

Dividend payout ratio=Yearly dividend per share/earnings per share

The dividend payout ratio measures the percentage of a company's net income that is given to share holders in the form of dividends.

2.Earning Retention Ratio: The proportion of net income that is not paid out as dividends.Most earnings retained are re- invested into the company's operations.
Tracking year-on-year earnings retention ratio is important to investigate whether a company is increasing(or)decreasing its rate of re-investment.
A company that retains a large portion of its net income, will anticipate having high growth(or) opportunities to expand its business.
High retention Ratio's are generally seen in growing company's more than established blue chip companies.

Earning retention Ratio= (Net Income-Dividends)/Net Income.

This is the opposite of the dividend payout ratio.


వెంకట్. బి said...

Good, May I know which are the companies have good track record paying dividends.

worldknowledge said...

Venkat..i already posted long back..For your convenience i am giving the link here...

chirag said...

another nice information thanks a lot

worldknowledge said...

Thanq chirag.

Internet earner said...

Nice post.

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