Retained Earnings Formula
Tracks how much profit a company has accumulated and reinvested over time rather than distributing to shareholders.
What It Tells You
The retained earnings formula shows how a company's cumulative profits change from one period to the next. It starts with the balance carried forward, adds the current period's net income, and subtracts any dividends paid out to shareholders. The resulting figure represents the total earnings the company has chosen to reinvest in operations, pay down debt, or hold in reserve rather than distribute.
Components
- Beginning REThe retained earnings balance at the start of the accounting period, carried forward from the prior period's ending balance.
- Net IncomeThe profit earned during the current period after subtracting all expenses, taxes, and interest from revenue.
- DividendsCash or stock distributions paid to shareholders during the period, reducing the amount of earnings retained in the business.
Worked Example
Company with $150,000 beginning RE, $75,000 net income, and $20,000 dividends
Why It Matters
Retained earnings are a key indicator of long-term financial health. A growing retained earnings balance signals that a company is consistently profitable and choosing to reinvest in itself — funding expansion, research, or debt repayment without needing outside capital.
Investors watch retained earnings to understand a company's dividend policy and growth strategy. A company paying large dividends may have lower retained earnings but happier income-focused shareholders, while a growth-stage company typically retains most of its earnings to fuel expansion.