Definition
Retained Earnings
Retained earnings are the cumulative profits a company has kept and reinvested rather than paid out as dividends, forming part of shareholders' equity.
Each year, profit after dividends is added to retained earnings (also called the surplus in the reserves), building the internally generated portion of equity. Over time, retained earnings often become the largest component of a mature company's net worth.
Retained earnings fund growth without diluting shareholders or raising debt. A company consistently growing retained earnings while earning high ROE is compounding shareholder value internally, while one drawing down reserves to pay dividends it cannot afford raises sustainability concerns.
Related terms
- Dividend Payout RatioThe dividend payout ratio is the share of net profit a company distributes to shareholders as dividends, with the rest retained for growth.
- Shareholders' EquityShareholders' equity is the residual interest in a company's assets after deducting liabilities, comprising share capital, reserves and retained earnings.
- Reserves and SurplusReserves and surplus are the accumulated profits and other equity surpluses a company has built up, sitting alongside share capital within shareholders' equity.
- Return on Equity (ROE)ROE measures how much net profit a company earns for each rupee of shareholders' equity, showing how efficiently it puts owners' money to work.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.