Learn how to find and calculate retained earnings using a company’s financial statements. Retained earnings are the profits (net income) that a business has earned at a certain point in time, less any dividends paid out to shareholders. Calculating retained earnings is not complicated once you understand how net income and dividends affect them.

Retained earnings are not the same as revenue, the amount of money a business earns in an accounting period. As an investor, one would like to know much more—such as the returns that the retained earnings have generated and if they were better than any alternative investments. Additionally, investors may prefer to see larger dividends rather than significant annual increases to retained earnings. You can find this number by subtracting your company’s total expenses from its total revenue for the period.

Can a Company with Negative Retained Earnings Pay a Dividend?

It tells you how much profit the company has made or lost within the established date range. The purpose of the retained earnings statement is to show how much profit the company has earned and reinvested. If you use retained earnings for expansion, you’ll need to determine a budget and stick to it. Doing so will ensure that your company uses its earnings efficiently and maintains the right balance between growth and profitability.

Established companies lean towards a balance of earnings surplus and dividends. Either there is little room for improvement with high-return projects, or there is demand from shareholders for a return of profit. Additionally, some short-term investors may prefer to see dividends rather than bookkeeping for startups annual significant increases to retained earnings. Higher dividend payouts will produce a low retention ratio and high payout ratio. Retained earnings consist of the surplus profits left after paying out dividends to shareholders at the end of an accounting period or financial year.

What Affects Retained Earnings

However, it is more difficult to interpret a company with high retained earnings. On the other hand, when a company generates surplus income, a portion of the long-term shareholders may expect some regular income in the form of dividends as a reward for putting their money in the company. Traders who look for short-term gains may also prefer dividend payments that offer instant gains. In the long run, such initiatives may lead to better returns for the company shareholders instead of those gained from dividend payouts. Paying off high-interest debt also may be preferred by both management and shareholders, instead of dividend payments. Management and shareholders may want the company to retain the earnings for several different reasons.

These earnings are considered “retained” because they have not been distributed to shareholders as dividends but have instead been kept by the company for future use. A business typically generates positive or negative earnings (profits or losses). If a company has generated more profits, it will pay out dividends to its shareholders for investing their money in the company. Any residual profits (retained earnings) are reinvested into the company to foster growth or used to pay off any outstanding debt the company may have.