The dividend payout ratio is calculated by dividing dividends paid by earnings after tax and multiplying the result by 100%. It represents how much of a company’s earnings after tax are paid to shareholders.
For example, a company earns $400,000 in net profit after tax and pays $100,000 in dividends to its shareholders, resulting in a dividend payout ratio of 25%. The remaining 75% is retained in the business to fund growth and maintain working capital.
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