Dividend Payout Ratio
This ratio tells us how much of profit is distributed to shareholders/investors in the form of dividends. It is calculated by dividing total declared dividends by PAT/net income.
Payout Ratio = Total dividends / PAT
In case of ABC Inc, the ratio would be 16.67% (2000/12000=0.1667). It tells us that only 16.67% of the profit generated by ABC was distributed to investors and rest was invested back in the company. As discussed previously, early stage companies tend to pay less dividends and reinvest more as they have more opportunity to grow. On the other hand, mature companies pay more dividends out of their profits as they have fewer growth opportunities. So early stage companies might have small payout ratios compared to large companies.
Apart from financial statement ratios, there are many other ratios like PE ratio and PB ratio which help us in making a better investment decision. In the next chapter we have covered some key ones.