Retained Earnings Definition
Retained Earnings represents the amount of profit a company has earned after any dividend payments.
Retained Earnings sometimes also seen as RE is the amount of net income that remains after a company has paid dividends to its shareholders. It is a balance sheet item and can be found within the shareholders or stockholders equity section. Typically any Retained Earnings will be reinvested in to the company, some examples include business expansion, mergers and acquisitions, buying new equipment or even repaying any loans/debts. Through reinvestment of retained earnings the company can hope for some form of return or higher earnings in the future. Alternative names given to Retained Earnings are Retained Capital and Accumulated Earnings.
The formula to determine the Retained Earnings is derived as;
Beginning Period RE Plus Net Income/Loss Minus Cash Dividends Minus Stock Dividends
Newly formed or growing companies may not pay dividends to their Shareholders, this enables them to make more efficient use of a larger retained earnings amount. By doing this they are be able to fund additional company growth and look to increase future profit amounts. On the other hand once a company reaches a certain level of maturity its prospect for growth and need for Retained Earnings reduces, giving a greater inclination to distribute to investors via dividends. It is important a company is able find a balance in the amount they retain and that they pay in dividends to help keep investors interested and continue driving stock prices.