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Retained earnings definition

Description

Retained earnings is a metric measure which shows a part of net income that is not paid out to the shareholders as a form of dividends. In other words, this money is used to be reinvested. Data to calculate this ratio is collected from the income statement, balance sheet and profit distribution statement.

It is a very important measure for the company’s owners. It indicates the amount of the profit they retained within the company. In most cases, companies reinvest their earnings into areas such as buying new machinery or spend it on more research and development.

Norms and limitations

Long term losses may lead to company’s bankruptcy.

Formula

Net income (net profit, net earnings), usually called “the bottom line”, is a measure which is calculated by taking revenues (sales and other incomes) and adjusting them to the cost of sales, operating cost, depreciation and amortization, interest, taxes and other expenses.

Retained earnings at the beginning are company’s earnings in the beginning of the financial year.

Dividends is a share of company's earned income, which is devoted to the shareholders once per financial year.