How to Find and Calculate Retained Earnings

Retained earnings represent the accumulated profits a company has kept over time, rather than distributing them to shareholders as dividends. This figure offers insights into a company’s financial health and its capacity for future growth, helping assess how much profit a business has reinvested versus paid out. Tracking this amount provides a clearer picture of a company’s strategy for expansion, debt reduction, or building financial reserves. This article aims to guide you on how to locate, calculate, and interpret this important accounting concept.

Identifying Retained Earnings on Financial Statements

Retained earnings are primarily found on a company’s Balance Sheet, which provides a snapshot of its assets, liabilities, and equity at a specific point in time. On the Balance Sheet, retained earnings are typically listed under the Shareholders’ Equity section. This section reflects the owners’ claim on the company’s assets after all liabilities have been accounted for.

A more detailed breakdown of how retained earnings have changed over a period can be found on the Statement of Retained Earnings. This statement, also known as the Statement of Changes in Equity or Statement of Stockholders’ Equity, reconciles beginning and ending balances by showing the impact of net income or loss and dividends. These statements are generally found in a company’s annual reports, such as 10-K filings for publicly traded companies, available through the Securities and Exchange Commission (SEC). Search for headings like “Retained Earnings” or “Accumulated Deficit” to pinpoint the figures.

Calculating Retained Earnings

The calculation of retained earnings uses a straightforward formula: Beginning Retained Earnings + Net Income (or – Net Loss) – Dividends = Ending Retained Earnings. This calculation is performed at the end of each accounting period (monthly, quarterly, or annually).

The “Beginning Retained Earnings” figure represents the balance from the end of the previous accounting period, carrying forward accumulated profits. “Net Income” (or “Net Loss”) is the company’s profit after all expenses, including taxes, deducted from its revenues, and sourced directly from the Income Statement. “Dividends” refer to the portion of profits a company distributes to its shareholders; only cash dividends reduce retained earnings. If a detailed Statement of Retained Earnings is unavailable, this formula allows for deriving the ending balance using data from the Income Statement and previous Balance Sheets.

Understanding the Meaning of Retained Earnings

Once found or calculated, the retained earnings figure offers insights into a company’s financial story. A positive balance indicates the company has historically generated profits and chosen to keep a portion within the business. This suggests profitability and potential for future self-funded growth. Conversely, a negative retained earnings balance, often called an accumulated deficit, signifies the company has either incurred accumulated losses or paid out more in dividends than it earned.

Observing the trend of retained earnings over multiple periods is important. Consistently growing retained earnings often points to a healthy, self-sustaining business effectively reinvesting its profits. These funds are typically used for reinvestment in operations (e.g., expanding facilities, funding research and development, acquiring new assets) or strengthening the balance sheet by paying down debt. However, retained earnings represent an accounting figure of accumulated profits and are not necessarily equivalent to the amount of cash a company has on hand.