Retained Earnings

Loading the player...

DEFINITION of 'Retained Earnings'

Retained earnings is the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business, or to pay debt. It is recorded under shareholders' equity on the balance sheet.

The formula calculates retained earnings by adding net income to (or subtracting any net losses from) beginning retained earnings and subtracting any dividends paid to shareholders:

Retained Earnings (RE) = Beginning RE + Net Income - Dividends

Also known as the "retention ratio" or "retained surplus".

BREAKING DOWN 'Retained Earnings'

In most cases, companies retain their earnings in order to invest them into areas where the company can create growth opportunities, such as buying new machinery or spending the money on more research and development.

Should a net loss be greater than beginning retained earnings, retained earnings can become negative, creating a deficit.

The retained earnings general ledger account is adjusted every time a journal entry is made to an income or expense account.

RELATED TERMS
  1. Dividend

    A distribution of a portion of a company's earnings, decided ...
  2. Retention Ratio

    The proportion of earnings kept back in the business as retained ...
  3. Unappropriated Retained Earnings

    Any portion of company earnings that are not classified as appropriated ...
  4. Appropriated Retained Earnings

    Any unappropriated retained earnings that are specifically not ...
  5. Look-Through Earnings

    Look-through earnings include the profits that a company pays ...
  6. Financial Statements

    Records that outline the financial activities of a business, ...
Related Articles
  1. Investing Basics

    Reading The Balance Sheet

    Learn about the components of the statement of financial position and how they relate to each other.
  2. Stock Analysis

    T-Mobile's 3 Key Financial Ratios (TMUS)

    Learn about how certain financial ratios say about T-Mobile's business and why the ratio are where they are, plus what it will take to improve those ratios.
  3. Investing Basics

    10 Ways to Profit From an Interest Rate Increase

    Discover 10 possible ways that individual investors and businesses can potentially profit from an environment of rising interest rates.
  4. Investing Basics

    Dividend Facts You May Not Know

    Discover the issues that complicate these payouts for investors.
  5. Fundamental Analysis

    Evaluating Retained Earnings: What Gets Kept Counts

    A company's retained earnings matter. Be investment-savvy and learn how to analyze this often overlooked information.
  6. Investing

    Retained Earnings

    Learn more about this calculation and why companies include it on the balance sheet.
  7. Economics

    Understanding Cost-Volume Profit Analysis

    Business managers use cost-volume profit analysis to gauge the profitability of their company’s products or services.
  8. Fundamental Analysis

    5 Basic Financial Ratios And What They Reveal

    Understanding financial ratios can help investors pick strong stocks and build wealth. Here are five to know.
  9. Investing Basics

    How to Analyze a Company's Inventory

    Discover how to analyze a company's inventory by understanding different types of inventory and doing a quantitative and qualitative assessment of inventory.
  10. Stock Analysis

    Understanding Chipotle's Financials (CMG)

    Learn about Chipotle Mexican Grill and its financial statements, including metrics such as comparable sales, operating margin and returns.
RELATED FAQS
  1. Do dividends affect working capital?

    Regardless of whether cash dividends are paid or accrued, a company's working capital is reduced. When cash dividends are ... Read Full Answer >>
  2. Do dividends go on the balance sheet?

    The only account recorded on the balance sheet, when dividends are declared and before they are paid out to a company's shareholders, ... Read Full Answer >>
  3. How do you calculate shareholder equity?

    Shareholders' equity is listed on a company's balance sheet and measures its net worth. A company's shareholders' equity ... Read Full Answer >>
  4. When should a company consider issuing a corporate bond vs. issuing stock?

    A company should consider issuing a corporate bond versus issuing stock after it has already exhausted all internal forms ... Read Full Answer >>
  5. Does the tradeoff model or the pecking order play a greater role in capital budgeting?

    The static trade-off theory and the pecking order theory are two financial principles that help a company choose its capital ... Read Full Answer >>
  6. What are the tax benefits of establishing a sinking fund?

    The primary tax benefit available through the creation of a sinking fund is a deduction for interest payments made. The other ... Read Full Answer >>
  7. What does a Z-Score tell a stock analyst about the health of a company?

    The Altman Z-score measures a company's likelihood of bankruptcy by using five ratios that are assigned different weights ... Read Full Answer >>
  8. How should I interpret a company's Cash Flow from Financing (CFF)?

    Cash flow from financing activities, or CFF, sometimes listed as financing cash flow, can be a strange metric to evaluate. ... Read Full Answer >>
  9. What does total stockholders equity represent?

    Total stockholders' equity represents either the source of a company's assets, the owners' residual claim of a company's ... Read Full Answer >>
  10. How are retained earnings related to a company's income statement?

    Retained earnings appear on a company's balance sheet and may also be listed on its income statement. Retained earnings may ... Read Full Answer >>
  11. How do I calculate dividend payout ratio from a balance sheet?

    The dividend payout ratio is an important aspect of fundamental analysis that can be calculated using easy-to-find data on ... Read Full Answer >>
  12. How do you calculate retained earnings per share?

    Calculating retained earnings per share involves taking net earnings, adding any currently held retained earnings, subtracting ... Read Full Answer >>
  13. Which transactions affect the retained earnings statement?

    Retained earnings are the portion of a company's income that management retains for internal operations instead of paying ... Read Full Answer >>
  14. Why would a stock that pays a large, consistent dividend have less price volatility ...

    To understand the differences in volatility commonly seen in the stock market, we first need to take a clear look at exactly ... Read Full Answer >>
  15. Can a company declare a dividend that exceeds its earnings per share?

    Yes, it can. In fact, many well-known Fortune 500 companies have paid dividends in years where they posted negative earnings ... Read Full Answer >>
Hot Definitions
  1. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  2. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  3. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  4. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  5. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center