Retained Earnings Definition
Retained earnings are the percentage of net income that is not paid out as dividends, but is instead reinvested back into the company. This reinvestment can take the form of new equipment, buildings, or even hiring additional staff. The advantage of retained earnings is that it allows a company to grow without having to take on new debt or sell new equity.
The downside of retained earnings is that they can tie up a lot of cash that could be used for other purposes, such as paying down debt or increasing dividends. Also, if a company’s stock price falls, the retained earnings can be wiped out completely. Finally, if a company goes bankrupt, the creditors may take all of the remaining assets, including the retained earnings.
