What Does Your Company Do with Its Retained Earnings?

Retained earnings is a financial value that is very important to investors of a company. If you are investing in a company, you should pay attention to where their retained earnings end up, as this has a lot to do with the profitability of the company. Here are a few things to consider about why you should care about where the retained earnings end up.

Retained Earnings

When a company makes a profit, they generally do two different things with it. Part of it will go out to the shareholders in the form of a dividend. Shareholders love dividends, and many companies like to use the majority of their profits to share the wealth. The rest of the money from the profit is kept by the company, and this becomes retained earnings.

Maintenance

Retained earnings can be used for a variety of things by the company. In some cases, the company has to use a good portion of the retained earnings for maintenance. This is especially true for companies that are in manufacturing or in other industrial fields. These large companies have to devote a good portion of their money to fixing equipment, buying new equipment and keeping up with the competition. They might have to use a good portion of their money to build a new factory or a distribution plant. These industries are considered to be capital-intensive, and a good portion of the retained earnings has to go to maintain their position in the industry.

Growth

Businesses that are not in a capital-intensive market can use their retained earnings for other things. In most cases, they will attempt to use them for the growth of the company. They might decide to branch out into other markets. They might put extra money into research and development of new products so that they can increase market share. There are many ways that a business could potentially invest their money so that they can grow. If you are an investor, you will generally like to see companies that value growth because that often means that the value of your shares will increase in the long run.

Justification

When you are an investor, you need to look at how the company uses its retained earnings. By doing this, you will be able to determine if the expenditures are justified or if the company is engaging in wasteful spending. If you find a company that is not making the best use of their retained earnings, they will most likely not be very profitable. In that case, you should avoid investing with them and try to find a company that makes the most of their retained earnings.

Some investors like to see companies that do not have much in the way of retained earnings at all. Instead, they want the majority of the profits to go to the shareholders in the form of dividends. If you are a dividend investor, this is extremely important to you.

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