Think of it like this: if a company has a dividend payout ratio of 0.5, it means they're paying out 50% of their profits as dividends. The remaining 50% is retained by the company, represented by a retention ratio of 0.5. 

Calculating Dividend Payout Ratio

The dividend payout ratio can be calculated in two ways:

1. Dividend per Share ÷ EPS: Using the example, if the EPS is Rs 4 and the dividend is Rs 2, the payout ratio is 50% (Rs 2 ÷ Rs 4).

2. Dividend ÷ Net Income: This method also yields the same result.

Evaluating the Payout Ratio

To determine if a 50% payout ratio is acceptable, you need to:

• Analyze the company's historical dividend payment trend

• Compare it with industry peers

Typically, large-cap companies with no major expansion plans pay higher dividends, as they are more established and mature. Companies with significant growth plans usually retain their profits and pay smaller dividends.

Retention Ratio

The retention ratio is the opposite of the dividend payout ratio. It's a key metric for identifying growth-oriented companies.

What it measures

The retention ratio shows how much of its profits a company retains. The assumption is that the retained amount will be reinvested in the company's growth. A high retention ratio indicates that a company has plans to expand its business.

Formula

The retention ratio can be calculated in two ways:

1. Net income - Dividends ÷ Net income

2. 100 - Dividend payout ratio

A high retention ratio suggests that a company is gearing up for significant expansion. Companies that want to fund their growth without external funding will typically increase their retention ratio.