The dividend payout ratio measures that portion of the profits given out as dividends. The Ratio is arrived at by dividing the yearly dividend per share by Earnings Per Share.

· Dividend per Share / EPS

The same figure can be arrived by dividing the dividend by net income. Let us say that If the earnings per share of a company are Rs 4 and it pays Rs 2 as a dividend, then the dividend payout ratio is 50%.

How do we know whether this 50% is acceptable? For this, one would have to analyze the dividend payment history and also the dividends given by its peers to come to a conclusion.

Usually, it is the large-cap companies that pay high dividends and are ‘mature companies’ as they may not have any major expansion plans shortly. A company having huge expansion plans retains its profits and will not pay out sizable dividends.

RETENTION RATIO

This ratio is just opposite to that of the dividend payout ratio. The retention ratio is important for locating growth-oriented companies.

The retention ratio will tell us how much the company has set aside from its profits. The assumption in the analysis is that the amount retained by the company will be reinvested towards the growth of the company. So, it is understood that any company that retains a sizable portion of its income has plans for expansion of its business. Usually, high retention ratios can be found in new growth companies. The formula for retention ratio is Net income minus dividends / Net income.

The retention ration ratio can also be arrived at by deducting the dividend pay-out from 100. A high retention ratio is an indication that the company is on the path of a huge expansion.

A company planning to maintain its growth without any external funding would increase the retention ratio.