What are retained earnings?

Retained earnings represent the cumulative amount of net income that a corporation has earned over time, minus any dividends distributed to its shareholders. When a company generates profits, it can choose to reinvest those profits back into the business, rather than paying them out as dividends. This reinvestment contributes to the company’s retained earnings, which can be used for various purposes such as funding new projects, paying off debt, or improving infrastructure.

This concept is essential as it reflects the organization's ability to grow and sustain itself through internal funding, enhancing its financial stability and potential for expansion. Understanding retained earnings is critical for stakeholders, as it indicates how well a business can generate returns without external financing. This understanding can help investors assess the company’s long-term viability and management decisions regarding profit distribution.