What are retained earnings?

Retained earnings refer to the cumulative amount of net income that a company has retained in the business instead of distributing it to shareholders as dividends. This means that when a company earns a profit, it can choose to reinvest those earnings back into the business, which contributes to the growth of the company. Retained earnings are recorded on the balance sheet under shareholders' equity and represent a key source of funding for various business activities, such as purchasing new equipment, financing research and development, or expanding operations.

The concept of retained earnings is essential for understanding how companies manage their profits and the financial decisions they make regarding reinvestment versus distributing dividends. This measure allows investors and analysts to assess how effectively a company is using its profits to fuel growth and enhance shareholder value.

While assets, liabilities, and specific portions of revenue might play significant roles in a company's financial health, they do not convey the same specific meaning as retained earnings, which is focused on profits retained for reinvestment rather than distribution.