What are retained earnings?

Retained earnings represent the portion of a company's net income that is kept within the company rather than distributed to shareholders as dividends. This accumulation of profits is used for various purposes, most notably for reinvesting in the business to fund growth initiatives, pay off debt, or enhance operational capabilities. Over time, these retained earnings can contribute significantly to the company's capital resources and financial health, as they demonstrate the firm’s ability to generate profit and reinvest in its future.

The concept emphasizes that retained earnings are not a direct cash reserve but rather an essential component of shareholders' equity on the balance sheet, indicating the retained profits that are available for reinvestment. This is critical for stakeholders as it reflects the company’s long-term financial strategy and stability.