What does the payout ratio reflect in a corporation?

The payout ratio reflects the percentage of a corporation's net income that is distributed to its shareholders in the form of dividends. This financial metric is important because it indicates how much profit a company is returning to its investors compared to how much it retains for reinvestment in the business. A higher payout ratio may suggest that a company is returning a significant portion of its income to shareholders, while a lower payout ratio may indicate that the company is reinvesting more of its earnings to fuel growth or maintain operations.

Understanding the payout ratio helps investors assess a company's financial health and its approach to profit distribution. It can also provide insight into the sustainability of the dividends, as a very high payout ratio relative to the industry average might raise concerns about the company's ability to maintain those dividend payments in the future. Thus, option B accurately describes the payout ratio by focusing on the distribution of net income to shareholders.