Short definition: Retained earnings are the portion of a company’s net income that is not distributed as dividends but is instead reinvested in the business or used to pay off debt.
Explanation: It represents the accumulated profits of a company since its inception, less any dividends paid out to shareholders. Retained earnings are an important component of a company’s equity and can be used to finance growth, fund research and development, or simply strengthen the company’s financial position.
Example: If a company has a net income of $1 million in a year and pays out $200,000 in dividends, its retained earnings would increase by $800,000.
Additional information (optional): Retained earnings are often seen as a measure of a company’s financial strength and stability. A high level of retained earnings indicates that a company has been profitable over time and has the resources to invest in its future growth.