While the payout ratio is a useful metric, it has limitations:
Ignoring Cash Flow: The ratio is based on net income, not cash flow. A company might have strong earnings but poor cash flow, affecting its ability to pay dividends. One-Time Events: Net income can be affected by one-time events like asset sales or write-offs, which might distort the payout ratio. Industry Variance: Payout ratios can vary significantly across industries, making it less useful for cross-industry comparisons.