Dividend payout ratio
In one sentenceProfits distributed to owners or shareholders divided by the period's net profit, showing what is distributed and what is kept in the business.
Simply put
What remains after distribution goes to retained earnings and funds the business's growth without loans. A high payout pleases the owners today, and a low payout builds the business's capacity for tomorrow.
Before distributing, check liquidity: profit in the books does not mean cash is available, and check the reserves required by the Companies Law or the company's articles.
Worked example
A trading company made a net profit of 500,000 SAR, and the partners decided to distribute 200,000 SAR of it.
Net profit500,000 SAR
Profits distributed200,000 SAR
Kept in the company = 500,000 − 200,000300,000 SAR
Payout ratio = 200,000 ÷ 500,00040%
Formula: Profits distributed ÷ net profit
Don't confuse it with
Retained earningsRetained earnings are a balance accumulated since incorporation, while the payout ratio concerns the profit of one period.