For accountants and investors alike, revenue and retained earnings represent important figures reported by corporations. Taken together, these pieces of data reflect how well a company is satisfying its customers and how efficiently it is able to do so. When a company's financial information is interpreted, revenue acts as a key driver for net income; how a corporation uses net income determines how much retained earnings are left in the master account.

The ratio between revenue and retained earnings is a telling statistic, although not necessarily a clairvoyant one. For instance, it may be difficult to determine if a company with unusually high revenue streams is storing enough cash on the chance that sales crash back down to normal. On the other hand, shareholders may be concerned that management is hoarding too much when there are investment or expansion opportunities.

What Is Revenue?

Revenue is the term used to account for the money received through the sale of a business's goods and services and the performance of the business's investments. Total revenue numbers inform investors about how well the company is able to make money.

Revenue should not be confused with profit, which is the number left over after expenses are subtracted from revenue. Total revenue is an important, but insufficient, indicator of a corporation's profitability.

Revenue (as recognized by accountants) is not a dollar-for-dollar representation of the cash that flows into a business during a given period of time. This is especially true for publicly traded companies, which use the accrual method of accounting, whereby revenue is recognized as it is earned, not necessarily when it is received.

What Are Retained Earnings?

As noted above, revenue minus expenses equals profit. Most businesses do not spend all the profit that they earn immediately. For publicly traded companies, some of the profit is distributed to shareholders in the form of dividends. Net earnings that are not paid out as dividends are kept in the corporation's coffers to be reinvested or used to pay down debt. Accountants refer to this figure as "retained earnings."

Retained earnings can be a negative number if net losses exceed beginning retained earnings. Investors usually keep a sharp eye on retained earnings. A company is better able to deal with the uncertainty of the future if it has a store of cash on hand, although this can be considered less important if borrowing conditions are favorable.

Connection Between Revenue and Retained Earnings

The direct relationship between revenue and retained earnings is obvious. More income generated through business sales and investments helps to generate higher profits and the ability to retain more earnings after bills and dividends have been paid.

How much revenue makes its way into retained earnings is a retained surplus and is represented to investors through the retention ratio. These figures help inform shareholder equity and company valuations.

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