The amount of a company’s retained earnings is the portion of its stockholders’ equity that consists of the profits generated but not paid out as dividends since the business began. The balance of retained earnings changes each accounting period. Net income, or profit, increases retained earnings, while net losses and dividend payments decrease retained earnings. A greater amount of retained earnings results in greater stockholders’ equity, which is the shareholders’ stake in the company. You can calculate a company’s retained earnings balance using information from its financial statements.
1. Obtain a company’s income statement and cash flow statement from its most recent accounting period, and obtain its balance sheet from its previous period. You can find these financial statements in its 10-Q quarterly reports or its 10-K annual reports. These reports can be found in the investor relations section of a company's website, or from EDGAR, the U.S. Securities and Exchange Commission’s online database.
2. Find the amount of the company’s retained earnings in the “Stockholders’ Equity” section of its previous period’s balance sheet. This is the beginning retained earnings balance for the most recent period. For example, assume the company had $100,000 in retained earnings in its previous period.
3. Find the amount of the company’s net income or net loss on its most recent income statement. In this example, assume the company generated net income of $20,000.
4. Find the amount of dividends the company paid, which can be found in the “Cash Flows from Financing Activities” section of its most recent cash flow statement. The cash flow statement shows this amount enclosed in parentheses because it is a cash outflow. For example, assume the company paid $5,000 in dividends during the most recent period.
5. Add net income to the previous period’s retained earnings. If the company had a net loss, subtract the net loss from retained earnings instead. In this example, add $20,000 in net income to $100,000 in retained earnings to get $120,000.
6. Subtract the amount of dividends from your result to calculate the retained earnings balance for the end of the most recent period. In the example, subtract $5,000 from $120,000 to get $115,000 in retained earnings at the end of the most recent period.
- Track a company’s retained earnings over different accounting periods. A growing retained earnings balance suggests the company is reinvesting profits into its business, which can increase stockholder value.
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