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learn what is retained earnings in 2 minutes

Retained earnings are the portion of a company’s net earnings that it doesn’t pay out to shareholders as dividends. The company keeps this money and reinvests it in the business or uses it to pay off a portion of its debt.
To see how much of its earnings a company has retained, look at the balance sheet under shareholder’s equity. Retained earnings can also be reported on a separate statement called the statement of retained earnings. You may also hear retained earnings referred to as the retention ratio or retained surplus.
When companies reinvest their retained earnings, they’re expecting to earn a return on that investment whether they’re investing in new machinery, research and development, expansion into another market or anything else that would help the company grow or become more efficient and profitable.
Increases in a company’s share price or its earnings per share overtime are good indicators of how effectively the company has been using its retained earnings to help the company grow. If a company is retaining its earnings but earnings per share aren’t increasing the company isn’t growing and investors will want to receive a dividend.
If the company is neither improving profitability not paying a dividend, investors may want to pass. Anything that affects a company’s net income such as a change in its expenses or revenue will affect its retained earnings.
If the company increases or decreases its dividend, this action will also affect retained earnings.



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