retained earnings
The portion of a company's profits that is kept and reinvested in the business rather than paid out as dividends.
Example
“The company used its retained earnings to fund new product development.”
Memory Tip
RETAINED = kept. The company RETAINS (keeps) these earnings instead of paying them out.
Why It Matters
Retained earnings show how much profit a company is reinvesting in growth rather than rewarding shareholders with dividends. For investors, this matters because it signals whether a company is focused on long-term expansion or immediate payouts, which affects stock price potential and your investment returns over time.
Common Misconception
Many people think retained earnings mean a company has cash sitting in a bank account ready to spend. In reality, retained earnings represent profits that have been reinvested into assets, equipment, research, or debt repayment, so the actual cash may no longer be available.
In Practice
Imagine a software company earns 10 million dollars in profit this year. Instead of paying 5 million as dividends to shareholders, it retains all 10 million to hire engineers and build new products. Those retained earnings become part of the company's equity and fuel its growth, making it potentially more valuable next year even though shareholders received no immediate cash.
Etymology
Retained (kept back) + earnings (profits) — profits kept rather than distributed.
Common Misspellings
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