A statement of retained earnings is an important document for businesses because it provides investors, lenders and analysts with insight as to how profits are being utilized within the company. The statement highlights changes in the retained earnings, usually over a 12-month period, providing insight into a business’s fiscal health.

The statement of retained earnings is the second step in preparing a company’s combined balance sheet, after the revenues and expenses are tabulated in the income statement. The statement of retained earnings is then compiled using that information, which provides a detailed overview of where the business stands in terms of accrued income and its ability to reinvests funds into its operations.

The income statement details a company’s revenue and expenses over a specified period, which is then used to generate the statement of retained earnings. The top line of the statement of retained earnings will report the prior period’s retained earnings, followed by a list of all items that were added or subtracted from those retained earnings over the period. Items such as dividends, net income or losses, and shared buybacks are all listed separately.

Once the changes to the retained earnings have been detailed, the statement will also provide the total current retained earnings. This figure can then be used to update the company’s balance sheet and is also useful for analysts to compare over time to evaluate the company’s investment strategy.

Overall, the statement of retained earnings serves as an important document in the investor’s toolkit. While not as comprehensive as the full income statement, an analysis of the statement of retained earnings reveals whether a company is utilizing its profits to reinvest in anti-cyclical future growth, or simply distributing them as dividends. Investors seeking long-term gains may be more drawn to companies which place a premium on reinvesting their profits, while those with a shorter investment horizon may be drawn to companies that issue regular dividends. No matter the timeframe, the statement of retained earnings provides an important overview of a company’s overall financial health.