Retained Earnings

RECENT NEWS
The Hindu Business Line  Feb 10  Comment 
‘Retained earnings cannot be used only for dividends, staff benefits’
Canada.com  Jul 2  Comment 
An anticipated writedown of US$4.5-billion to US$5.5-billion on the bungled Pascua-Lama project would eliminate the US$3.9-billion in retained profits that the gold giant reported at the end of the first quarter
Commodity Online  Mar 19  Comment 
Let's extend this further. Companies can get gold loans instead of paper money loans. With a paper loan, the financier will require the company to hedge some of its gold forward to ensure that the loan is repaid. If the company banked it in gold,...
JCN Network  May 24  Comment 
Fujitsu Limited announced that its Board of Directors today decided upon the dividends to be paid from retained earnings to shareholders on the record date of March 31, 2012, as indicated below.
Business Times - Malaysia  Apr 19  Comment 
Ta Ann Holdings Bhd has proposed to undertake bonus issue of up to 61,796,130 bonus shares of RM1 each to be credited as fully paid-up on the basis of one bonus share for every five existing shares held on the entitlement date. In a filing to...
ValueWalk.com  Jan 26  Comment 
 We are pleased to announce a new Graham-Dodd calculator,  which has been added to the site. The screener consists of a formula using tangible book value, retained earnings, and dividends. You can find more information about the formula on...
BusinessWeek  Oct 28  Comment 
Erste Group Bank AG said a third- quarter loss won’t prevent eastern Europe’s second-biggest lender from plugging the capital gap found by regulators “mostly” with retained earnings.
BusinessWeek  Jun 29  Comment 
Contingent convertible bonds will remain an option for boosting capital at the world’s biggest banks even after the Basel Committee on Banking Supervision this month said it favored retained earnings and ordinary shares.




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Retained Earnings is the portion of net income that the company does not distribute to its shareholders as dividends

Retained earnings appear on a company's balance sheet and are accumulated from one year to the next. When accumulated retained earnings is negative, it is called retained losses (also known as accumulated losses, or accumulated deficit). Retained earnings are calculated by adding net income and subtracting dividends from last year's retained earnings.

Ending retained earnings = Beginning retained earnings + net income - dividends

When looked at in conjunction with net income, retained earnings is used as an indicator of the company's priorities vis-a-vis paying its shareholders or bringing that money with it into its next fiscal period.

Fluctuations in retained earnings may be an indicator of a company's expectations for upcoming fiscal period: if a company's retained earnings increase dramatically one year or quarter, it may be indicative of a pessimistic outlook for the upcoming fiscal period. By contrast, if retained earnings decrease, the company is paying its shareholders a hefty dividend and is therefore likely optimistic about future earnings.

Example

Suppose a company begins business on 20X1 and has net income of $50 million. It does not pay any dividends. Then its retained earnings for the year would be $50 million (0+50-0). In 20X2, the company earns $40 million and pays $10 million in dividends. Its retained earnings for the end of the year would be $80 million (50+40-10). In 20X3, the company makes a loss of $100 million and pays no dividends; at the end of 20X3, the company's accumulated deficit (since retained earnings is negative) would be $20 million (80-100).

Equation

The retained earnings account on the balance sheet is said to represent an "accumulation of earnings" since net profits and losses are added/subtracted from the account from period to period.

The general equation can be expressed as following:

Ending Retained Earnings = Beginning Retained Earnings - Dividends Paid + Net Income

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