Retained Earnings Calculator
Calculate the accumulated profit of your business after dividend payments.
Ending Retained Earnings
What are Retained Earnings?
Retained earnings represent the cumulative portion of a business's net income that is kept (retained) by the company rather than distributed to its shareholders as dividends. This figure is a vital component of the shareholders' equity section on a balance sheet and indicates how much of the company's profits have been reinvested in the business.
A company might use these funds to purchase new equipment, invest in Research and Development (R&D), or pay off existing debt. If a business consistently shows a high level of retained earnings, it often signals financial health and the capacity for internal growth.
The Retained Earnings Formula
The calculation is straightforward but requires data from both the previous period's balance sheet and the current period's income statement.
How to Calculate Retained Earnings
- Beginning Retained Earnings: This is the ending balance from the previous accounting period (month, quarter, or year).
- Net Income: The total profit earned during the current period after all expenses and taxes are deducted. If the company suffered a loss, this number will be negative.
- Dividends: The total value of cash or stock dividends declared and paid to shareholders during the period.
Practical Example
Imagine a small manufacturing company, "TechBuild Ltd.", at the end of the fiscal year:
- Beginning Retained Earnings (Jan 1st): 100,000
- Net Income for the Year: 45,000
- Dividends Paid to Shareholders: 10,000
Using the formula: 100,000 + 45,000 – 10,000 = 135,000. TechBuild Ltd. will start the next year with 135,000 in retained earnings.
Why Monitoring Retained Earnings Matters
Investors look at retained earnings to determine the "Plowback Ratio" (or Retention Ratio). A high ratio suggests a "growth company" that reinvests everything into expansion. A lower ratio suggests a "mature company" that generates more cash than it can effectively reinvest, choosing instead to reward shareholders with dividends.