Investing term
What is Retained earnings?
Cumulative net income kept in the business, not paid out as dividends — sits in shareholders' equity.
Retained earnings are the cumulative profits a company has kept and reinvested rather than paid out as dividends, sitting in shareholders' equity on the balance sheet. Each year, whatever net income isn't distributed as dividends is added to retained earnings, so the figure builds up over the company's history.
It shows how much of its lifetime profit the business has plowed back in rather than returning to owners. Whether that's good depends entirely on the returns earned on that reinvested money: profits retained and reinvested at high returns compound shareholders' wealth powerfully, while profits retained and squandered on poor projects or bad acquisitions destroy value that could have been paid out. So retained earnings aren't automatically a sign of strength — they're capital the company chose to keep, and the question is whether it used that capital well.
Retained earnings are the lifetime profits a company kept and reinvested rather than paying out as dividends. Good only if reinvested at strong returns — otherwise owners would have been better paid.
For example
A company that has kept and reinvested $5B of lifetime profits shows $5B of retained earnings — value that's good only if it earned strong returns on that reinvested money.
Learn it by doing
That's Retained earnings in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 14, Reading Financial Statements).
Try the free lesson →Why it matters to you
Retained earnings matter because they represent capital management kept rather than returned — and the quality of that decision is central to shareholder value. Warren Buffett's test is whether each dollar retained creates at least a dollar of market value; if not, the company would have served owners better by paying it out. Watching retained earnings alongside the returns the company earns on its reinvestment reveals whether management is a good steward of shareholders' money or is hoarding and misallocating it.
⚠ Assuming large retained earnings mean strength
A big retained-earnings balance simply means a company kept a lot of its profits — it says nothing about whether that money was used well. Profits reinvested at poor returns, or on value-destroying acquisitions, would have been better paid out as dividends. Treating high retained earnings as automatically good ignores the crucial question of what returns the company earned on the money it kept.