Term · Valuation
Payout ratio
In briefThe payout ratio indicates what portion of profit or free cash flow goes to shareholders as a dividend. For small caps it makes the sustainability of the dividend and the remaining internal financing visible.
Definition
The payout ratio shows what share of profit or free cash flow is paid out as a dividend.
How it is calculated
Formula. Payout ratio = dividend / net income or dividend / free cash flow.
Why it matters for small caps
The concept is relevant for small caps because for them it makes the sustainability of dividends and the remaining internal financing visible.
Common misreadings
- A low payout ratio is often automatically seen as positive, although it can also point to a lack of capital discipline or high reinvestment risks.
In the process
Frequently asked
What is the payout ratio?
It indicates what portion of earnings flows to shareholders. The rest remains in the company.
How is the payout ratio calculated?
You divide the dividend by net income or by free cash flow. This shows how much of what was earned is paid out.
Is a low payout ratio automatically good?
Not necessarily; it can point to reinvestment, but also to a lack of capital discipline. What is decisive is whether the retained funds are put to sensible use.
Related terms
Sources
Primary
NYU Stern – Aswath Damodaran, Valuation Resources
https://pages.stern.nyu.edu/\~adamodar/
https://pages.stern.nyu.edu/\~adamodar/
Methodology
ESMA – Guidelines on Alternative Performance Measures
https://www.esma.europa.eu/document/esma-guidelines-alternative-performance-measures
https://www.esma.europa.eu/document/esma-guidelines-alternative-performance-measures
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.