| retained earnings The accumulated net income that has been retained for reinvestment in the business rather than being paid out in dividends to stockholders. Net income that is retained in the business can be used to acquire additional income-earning assets that result in increased income in future years. Retained earnings is a part of the owners' equity section of a firm's balance sheet. Also called earned surplus, surplus, undistributed profits. See also accumulated earnings tax, restricted retained earnings, statement of retained earnings. |
Retained earnings. Retained earnings, also known as retained surplus, are the portion of a company's profits that it keeps to reinvest in the business or pay off debt, rather than paying them out as dividends to its investors.
Retained earnings are one component of the corporation's net worth and increase the supply of cash that's available for acquisitions, repurchase of outstanding shares, or other expenditures the board of directors authorizes.
Smaller and faster-growing companies tend to have a high ratio of retained earnings to fuel research and development plus new product expansion. Mature firms, on the other hand, tend to pay out a higher percentage of their profits as dividends.
What Does Retained Earnings Mean?
Also called retention ratio or retained surplus, it 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. It is calculated by adding net income to or subtracting any net losses from beginning retained earnings and subtracting any dividends paid to shareholders, as shown here:
Investopedia explains Retained Earnings
In most cases, companies retain their earnings to invest them in areas where the company can create growth opportunities, such as buying new machinery or spending the money on research and development. If a net loss is greater than beginning retained earnings, retained earnings can become negative, creating a deficit.
Related Terms:
• Balance Sheet
• Cost of Capital
• Income Statement
• Net Income—NI
• Shareholders' Equity
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