Retained earnings are the net income that a business retains after paying out dividends to its shareholders. Companies can use retained earnings to fuel many aspects of their operations ranging from financing expansion activities, developing new products and share buybacks. One of the major advantages of retaining earnings rather than distributing them is the increased revenue and profit growth. Retained earnings are a company’s own savings and can allow for improved future earnings and value for a company.

Since retained earnings are formed from the profit that a company accumulates and retains, they are a key indicator of a company’s financial health. Retained earnings are compared to other trends such as earnings per share, dividend per share and price-to-earnings ratio in order to assess the short-term and long-term potential of a company.

In addition to serving as a valuable financial indicator, retained earnings are also critical for capital budgeting and financial forecasting. Companies use retained earnings to finance new product development, expanding their production capacity, launching more sales representative, purchasing new machinery and more. A company’s capital budget is usually planned in light of its retained earnings and its projected use within the next few years. Financial forecasting provides guidance on what the effects of different strategies will be, which helps companies make better strategic and operational decisions.

Retained earnings are a key component of corporate financial management and serve as the fertilizer for future growth. Thus, companies should be well-informed about the impact of their retained earnings and use this information to make strategic decisions. By investing in the development and growth of the business, companies can benefit from long-term stability and profitability.