Retained earnings are the portion of profit a company keeps after paying dividends — the fuel for future growth. Investors read them to judge reinvestment and health. Here is the clear explanation.
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What Are Retained Earnings?
They are cumulative profits not distributed to shareholders. Calculated as: beginning retained earnings + net income − dividends = ending retained earnings.
Why They Matter
- Funding growth: companies reinvest to expand without borrowing.
- Financial health: strong retained earnings signal sustained profitability.
- Investor signal: consistent growth in retained earnings usually means value compounding.
What Retained Earnings Buy
Equipment, research, acquisitions, debt repayment or cash buffers. The company can also return them to shareholders later as dividends or buybacks.
FAQ
Are retained earnings the same as cash?
No — they are an accounting measure; the cash may already be invested in assets.
Can retained earnings be negative?
Yes — cumulative losses can drive an accumulated deficit.
Related: Income Statement and Cost of Capital.