What is Retained Earnings?
Retained earnings is the portion of a company's net income that is not distributed to its shareholders as dividends, but is instead reinvested in the company. This can include things like new equipment or hiring new employees. The retained earnings calculation starts with a company's net income, which is found by subtracting expenses from revenue. That number is then divided by the number of shares outstanding to find the earnings per share. The next step is to multiply the earnings per share by the number of shares outstanding to find the total amount of retained earnings. This number can be used to measure a company's financial health and performance over time.
How Do You Calculate Retained Earnings?
Retained earnings are a company's cumulative net income minus dividends paid to shareholders. The formula for calculating retained earnings is:
Retained Earnings = Net Income - Dividends Paid
To calculate retained earnings for a specific period, simply subtract the dividends paid for that period from the net income for the same period.
Why Is It Important to Know Your Retained Earnings?
Retained earnings are an important metric to track for publicly traded companies because they represent the cumulative profits that have been reinvested back into the company. The retained earnings figure can be used to calculate several key ratios, including the return on equity (ROE) and the debt-to-equity (D/E) ratio. The ROE measures how efficiently a company is using its profits to generate returns for shareholders, while the D/E ratio indicates how leveraged a company is. Both of these ratios can be used to evaluate a company's financial health and prospects for future growth.
