Cash dividends to common stocks / Net profit

Payout ratio = Ordinary dividends / Net profit

The payout ratio provides an idea of how well earnings support a company's dividend payments. A company with a high payout ratio can be appealing to investors who primarily value income above increases in the share price. But there are drawbacks to a high payout dividend policy : first, less cash is left for re-investment, secondly a decline in earnings would translate into a sudden cut in dividends, which gives a negative signal to stockmarkets.