If you are looking for the formula aimed at calculating retained earnings, you have landed on the right page.
If you look closely at a company's quarterly financial report, there will be several details mentioned in there. One of the most important numbers that you as a share holder should note is the retained earnings value of the company. It is an important parameter for gauging the performance of the company in any quarter.
What are Retained Earnings?
How do companies grow and develop their capital base to make new developments that give them the edge to compete with other industries in a sector? It is only through reinvestment of their own profit in the business. These reinvested profit sums are known as retained earnings of a company. In technical language, it is the part of the net income that is reinvested by a public listed company in its business after paying out dividends to its shareholders. It is an important parameter of consideration in stock research.
It is up to the management how it uses the earnings for the benefit of the business. The funds may be diverted towards repayment of an outstanding debt or it may be used to further developmental or expansion plans.
The value of retained earnings will usually be listed under share holder's equity details in the company balance sheet. Instead of consuming the earnings, if they are invested smartly, a company prospers. It can create new assets and develop new projects which can help it cope with competition in a ruthless market.
Formula
The formula for calculation should be obvious after I defined it in the previous section. Here it is:
Retained Earnings (RE) = (Previous Retained Earnings + Net Income - Dividends Paid)
Thus you need to know three parameters. First thing is the beginner or previous retained earnings from earlier quarters and the net income of the company if any, after adjusting for losses and dividends paid.
This surplus money generated can be used for research and development or to clear out any of the outstanding debts that a company might be facing. It may also be used for marketing and buying of new machinery.
Managing the earnings is one of the prime financial management goals of any company. Great CEOs are marked by their ability to make good use of the earnings for the company's expansion in more areas. These funds provide a company with an opportunity to adapt to changing conditions and enter into previously unexplored territory, where it can increase its sales.
Using the Formula
Now that you know the formula, all that you have to do is substitute the requisite values of certain parameters to get the value. Let me illustrate it with an example.
A company has previous retained earnings of $1,000,000. In the past quarter, it has recorded a net income of $1,500,000 after taxes, out of which $300,000 must be paid in dividends. Then what will be the retained earnings of the company? Using the above formula:
Retained Earnings = ($1,000,000 + $1,500,000 - 300,000 ) = $2,200,000
Using this formula, one can account for the surplus profit made by the company, which is available for reinvestment. As explained before, retained earnings is what drives the growth of the company. Companies that have reached the top, have managers who know how to invest these earnings wisely.
By Omkar Phatak
Published: 12/11/2010
Read more at Buzzle: http://www.buzzle.com/articles/retained-earnings-formula.html
If you look closely at a company's quarterly financial report, there will be several details mentioned in there. One of the most important numbers that you as a share holder should note is the retained earnings value of the company. It is an important parameter for gauging the performance of the company in any quarter.
What are Retained Earnings?
How do companies grow and develop their capital base to make new developments that give them the edge to compete with other industries in a sector? It is only through reinvestment of their own profit in the business. These reinvested profit sums are known as retained earnings of a company. In technical language, it is the part of the net income that is reinvested by a public listed company in its business after paying out dividends to its shareholders. It is an important parameter of consideration in stock research.
It is up to the management how it uses the earnings for the benefit of the business. The funds may be diverted towards repayment of an outstanding debt or it may be used to further developmental or expansion plans.
The value of retained earnings will usually be listed under share holder's equity details in the company balance sheet. Instead of consuming the earnings, if they are invested smartly, a company prospers. It can create new assets and develop new projects which can help it cope with competition in a ruthless market.
Formula
The formula for calculation should be obvious after I defined it in the previous section. Here it is:
Retained Earnings (RE) = (Previous Retained Earnings + Net Income - Dividends Paid)
Thus you need to know three parameters. First thing is the beginner or previous retained earnings from earlier quarters and the net income of the company if any, after adjusting for losses and dividends paid.
This surplus money generated can be used for research and development or to clear out any of the outstanding debts that a company might be facing. It may also be used for marketing and buying of new machinery.
Managing the earnings is one of the prime financial management goals of any company. Great CEOs are marked by their ability to make good use of the earnings for the company's expansion in more areas. These funds provide a company with an opportunity to adapt to changing conditions and enter into previously unexplored territory, where it can increase its sales.
Using the Formula
Now that you know the formula, all that you have to do is substitute the requisite values of certain parameters to get the value. Let me illustrate it with an example.
A company has previous retained earnings of $1,000,000. In the past quarter, it has recorded a net income of $1,500,000 after taxes, out of which $300,000 must be paid in dividends. Then what will be the retained earnings of the company? Using the above formula:
Retained Earnings = ($1,000,000 + $1,500,000 - 300,000 ) = $2,200,000
Using this formula, one can account for the surplus profit made by the company, which is available for reinvestment. As explained before, retained earnings is what drives the growth of the company. Companies that have reached the top, have managers who know how to invest these earnings wisely.
By Omkar Phatak
Published: 12/11/2010
Read more at Buzzle: http://www.buzzle.com/articles/retained-earnings-formula.html
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