Was this calculator helpful?
Ending RE = Beginning RE + Net Income − Dividends
Retention Ratio = (Net Income − Dividends) ÷ Net Income
Dividend Payout Ratio = Dividends ÷ Net Income
Change in RE = Ending RE − Beginning RE
What Are Retained Earnings and How Are They Calculated?
Retained earnings represent the cumulative portion of a company's net profits that have been kept and reinvested in the business rather than distributed to shareholders as dividends. They appear in the stockholders' equity section of the balance sheet and grow over time as a company generates profits.
Understanding retained earnings is critical for investors, analysts, and business owners because it reveals how efficiently a company is deploying its profits — whether it is growing its asset base, paying down debt, or returning value to shareholders.
Ending RE = $500,000 + $120,000 − $30,000 = $590,000
Retention Ratio = ($120,000 − $30,000) ÷ $120,000 = 75%
Retention Ratio Benchmarks by Industry
| Industry | Typical Retention Ratio | Strategy |
|---|---|---|
| Technology / Software | 80–100% | Reinvest heavily in R&D and growth |
| Healthcare / Biotech | 70–95% | Capital-intensive R&D pipeline |
| Consumer Discretionary | 50–75% | Balanced growth and dividends |
| Utilities | 20–40% | High dividend payout to income investors |
| Real Estate (REITs) | 0–10% | Required by law to pay 90%+ of income |
| Banks / Financial | 40–60% | Regulatory capital requirements |
Retained Earnings vs Related Metrics
| Metric | Formula | What It Shows |
|---|---|---|
| Ending RE | Begin RE + NI − Divs | Cumulative reinvested profits |
| Retention Ratio | (NI − Divs) ÷ NI | % of profit kept by company |
| Payout Ratio | Divs ÷ NI | % of profit returned to shareholders |
| Change in RE | Ending RE − Beginning RE | Net addition this period |
Ending RE = Beginning RE + Net Income − Dividends. This shows the cumulative profits a company has kept rather than distributed to shareholders.
Above 50% is healthy for growth companies. Mature companies and utilities often retain 20–40%. REITs by law must pay out 90%+ so their retention is near zero.
Net income is profit from a single period. Retained earnings is the cumulative total of all past net incomes minus all dividends ever paid — it accumulates on the balance sheet over many years.
Yes. Negative retained earnings (accumulated deficit) occur when cumulative losses or dividends exceed cumulative profits. Common in early-stage companies.
In the stockholders equity section of the balance sheet, and detailed in the Statement of Retained Earnings showing beginning balance, net income, dividends, and ending balance.
The retention (plowback) ratio = (Net Income − Dividends) ÷ Net Income. It shows the percentage of profit kept. A ratio of 1.0 means all profit is retained; 0 means all paid out.
Payout Ratio = Dividends ÷ Net Income. It is the inverse of the retention ratio. Above 100% means paying more than earned — unsustainable long-term.
High retained earnings signal strong profitability and reinvestment capacity, supporting higher valuations. The optimal retention rate depends on whether the company earns returns above its cost of capital.
No. Retained earnings is an accounting concept representing cumulative reinvested profits. The cash may have been used for equipment, inventory, debt paydown, or operations.
In the Stockholders Equity section, after common stock and additional paid-in capital. It represents the sum of all prior net incomes minus all dividends since the company was founded.