Glossary
Retained earnings
The running total of a company’s profits kept in the business rather than paid out as dividends, shown in shareholders’ equity.
On this page
Retained earnings are the cumulative profits a company has earned over its life, minus all the dividends it has paid. The figure appears in the shareholders' equity section of the Balance sheet. It tells you how much of the equity was generated by the business itself, as opposed to money raised by selling shares. When losses have exceeded profits, the line becomes negative and is usually labeled an accumulated deficit.
How it works
Each period, retained earnings roll forward:
Retained earnings are an accounting total, not a pile of cash. The profits kept over the years have been spent on factories, inventory, acquisitions, debt repayment or anything else, so a company can show billions in retained earnings and little cash.
How to read it
- Steady growth usually signals a profitable business reinvesting in itself.
- A negative balance is common in young growth companies that have not yet turned a profit, and in mature firms that have paid out more than they earned, sometimes funded with debt.
- Buybacks are often recorded as treasury stock, a separate negative line in equity, though some companies retire the repurchased shares and charge part of the cost against retained earnings, which can push the balance down quickly.
The more useful question is whether the money kept is earning a good return. Comparing growth in retained earnings with growth in profits, or looking at Return on equity (ROE) and Return on invested capital (ROIC), shows whether reinvestment is creating value.