Retained Earnings

Retained earnings are the profits a company has kept rather than paid out as dividends. Each year, net profit minus dividends is added to the balance.

This money funds growth — new plants, research and development, acquisitions. Its importance is that it allows investment without borrowing.

A steadily rising balance means consistent profitability. A negative balance means accumulated past losses, referred to as an accumulated deficit.

Hoarding is not always right, though. Piling up cash with no worthwhile investment available means shareholders would be better served by dividends or buybacks — a balance that is perpetually debated.

A large retained earnings figure does not mean that much cash is on hand. It may already have become equipment or inventory. Actual cash must be read from the cash line of the balance sheet.