Answers the Question
How much wealthier is the company?
Calculator for Retained Earnings
What Is the Retained Earnings?
As a company continues operating, it should (hopefully) take in more money than it spends. Some of that is given to shareholders in the form of dividends, but the rest remains with the company for purposes of acquiring even greater levels of profit.
Why Is it Important?
- Understanding how much in the way of retained earnings have been accumulated will let firms and investors know the potential for paying out dividends.
Formula(s) to Calculate Retained Earnings
- RETAINED EARNINGS = INITIAL RETAINED EARNINGS + NET INCOME - DIVIDENDS
- Forgetting to include the starting level of retained earnings.
- Comparing the retained earnings of two companies that are in different sectors or are different ages. Companies in some fields have greater potential for earnings. Old companies will have had more opportunities to increase retained earnings.