Which financial metric is linked to both profitability and returns to shareholders?

The payout ratio is indeed a financial metric closely linked to both profitability and returns to shareholders. This ratio expresses the portion of earnings that a company pays out as dividends to its shareholders, highlighting the relationship between a company's profitability and the returns it provides to its equity investors. A higher payout ratio typically indicates that the company is sharing more of its profits with shareholders, which can be an attractive signal for investors looking for immediate returns through dividends.

In terms of profitability, the payout ratio relies on net income as its basis, which means that for a company to maintain or grow its dividend payments, it must be generating sufficient profits. Consequently, a healthy payout ratio can reflect good profitability while also indicating a commitment to returning capital to shareholders, thereby enhancing shareholder value.

On the other hand, the current ratio, interest coverage ratio, and gross margin focus on different aspects of a company's financial health. The current ratio assesses liquidity, the interest coverage ratio looks at a company's ability to meet its interest obligations, and gross margin provides insight into operational efficiency rather than directly reflecting returns to shareholders. Therefore, these metrics do not capture the dual focus on profitability and shareholder returns as effectively as the payout ratio.