When you're tracking a company's financial health — whether it's your own small business or a stock you’re considering — one number stands out: retained earnings.
But what exactly are retained earnings, and how do you calculate retained earnings easily?
In this guide, we’ll break it down step-by-step, with real examples, a simple formula, and why this number matters for business growth, investing, and long-term financial planning.
What Are Retained Earnings?
Retained earnings are the portion of a company’s profits that are not paid out as dividends but are instead kept (or “retained”) to reinvest in the business.
In simple terms, it’s the money a company has left over after paying shareholders, used to fund things like:
-
Business expansion
-
New product development
-
Marketing efforts
-
Debt reduction
-
Building emergency reserves
Retained earnings are reported on the balance sheet under shareholders' equity — and they accumulate over time.
Why Retained Earnings Matter
Knowing how to calculate retained earnings is useful for:
✅ Business owners — to assess reinvestment potential
✅ Investors — to evaluate a company’s long-term health
✅ Accountants and students — for financial analysis and reporting
✅ Entrepreneurs — to track growth and sustainability
It helps answer questions like:
-
Is the company growing or bleeding cash?
-
Are profits being used wisely?
-
How much value is being reinvested vs. distributed?
How to Calculate Retained Earnings Easily
Here’s the basic retained earnings formula:
Let’s break it down:
-
Beginning Retained Earnings – This is the amount from the previous accounting period.
-
Net Income – The company's profit after all expenses (found on the income statement).
-
Dividends Paid – What the company pays out to shareholders.
🧮 Example Calculation:
Let’s say a company had:
-
Beginning Retained Earnings = $50,000
-
Net Income (this year) = $30,000
-
Dividends Paid = $10,000
Then:
So, after reinvesting most of their earnings and paying some out to shareholders, the company now has $70,000 in retained earnings.
Where to Find the Numbers
You’ll need two main financial statements:
-
📊 Income Statement → for net income
-
📄 Balance Sheet → for beginning retained earnings and previous ending balance
These are typically available in:
-
Annual reports (10-K forms)
-
Quarterly earnings reports
-
Accounting software if it’s your own business
What Retained Earnings Tell You
Retained earnings help you:
📈 1. Understand Growth Strategy
A company with high retained earnings may be:
-
Reinvesting for future growth
-
Reducing debt
-
Saving for strategic acquisitions
On the flip side, consistently low retained earnings could mean:
-
Weak profitability
-
High dividend payouts
-
Financial instability
💡 2. Evaluate Dividend Policy
Companies that don’t pay dividends (like many tech firms) often have higher retained earnings because they reinvest everything.
In contrast, companies that pay generous dividends may show slower retained earnings growth — but could be appealing for income investors.
🔍 3. Spot Financial Red Flags
If retained earnings shrink year after year, even with high revenue, it could signal:
-
High operating costs
-
Poor financial management
-
Unsustainable dividend policies
Learn how to avoid major money mistakes in The Biggest Mistake Parents Make Setting Up a Trust Fund.
Retained Earnings vs. Revenue vs. Net Income
| Term | What It Is | Where It Comes From |
|---|---|---|
| Revenue | Total sales (top line) | Income statement |
| Net Income | Profit after expenses | Income statement |
| Retained Earnings | Cumulative leftover profits not distributed | Balance sheet |
Retained earnings = long-term wealth building for a company, just like investing does for individuals.
Want to understand that better? See Why Investing Is a More Powerful Tool to Build Long-Term Wealth Than Saving.
How to Track Retained Earnings in Your Own Business
If you're a small business owner or entrepreneur:
-
Use accounting software like QuickBooks or Wave — they calculate retained earnings automatically.
-
Close out books each fiscal year to update beginning balances.
-
Decide whether to reinvest or pay out profits based on your business goals.
-
Use retained earnings to fuel growth — not just sit in your account.
If you’re still getting started financially, see how to build your base in Low-Stress Jobs That Pay Well Without a Degree.
Smart Financial Lifestyle: Helping You Master Business & Personal Finance
At Smart Financial Lifestyle, we help individuals and business owners like you:
-
Understand essential financial metrics
-
Make smart reinvestment decisions
-
Create wealth that lasts generations
Whether you're learning how to run a business, invest, or leave a legacy — it all starts with knowing your numbers.
Final Takeaway: Retained Earnings = Business Wealth
Knowing how to calculate retained earnings easily helps you:
-
See how profitable a company really is
-
Track how much is reinvested vs. paid out
-
Make better business and investment decisions
It’s not just accounting - it’s your roadmap to financial growth.