1---
 2meta: 
 3  date: false
 4  reading_time: false
 5title: "Retained Earnings"
 6date: 2023-10-07
 7description: "The part of company profits which is not paid out in taxes or dividends, but is reinvested back into the business."
 8tags: ["Finance", "Accounting", "Corporate Finance"]
 9---
10
11## Background
12
13Retained earnings refer to the proportion of net earnings that a company keeps to itself, rather than distributing it among shareholders as dividends. This retained portion is utilized by the company to reinvest in its own operations, finance new projects, or improve its balance sheet. Essentially, it is a critical element in a company's financial statement, reflecting how profit use aligns with long-term growth and sustainability prospects.
14
15## Historical Context
16
17The concept of retained earnings has been inherent in corporate finance since the early development of joint-stock companies. Originally, profits were typically distributed extensively as dividends; however, the modern approach encourages reinvestment of a substantial portion of profits to support organic growth and maintain competitive advantage.
18
19## Definitions and Concepts
20
211. **Retained Earnings:** The accumulated portion of net income that a corporation holds onto for reinvestment in operations, expansion projects, debt reduction, or to increase liquid assets, rather than paying out as dividends to shareholders.
222. **Net Income:** The profit a company retains after deducting all costs associated with producing its goods and services, including taxes and operational expenses.
233. **Dividends:** Part of a company’s profits paid out to shareholders as compensation for their investment.
24
25## Major Analytical Frameworks
26
27### Classical Economics
28
29Classical economists often focus on the relationship between savings, investment, and economic growth. Retained earnings can be seen as essential savings within a firm's own operations, thereby simulating further investments.
30
31### Neoclassical Economics
32
33In the context of neoclassical economics, a focus on marginal productivity and capital also attributes significant importance to how retained earnings are reinvested for business enhancement and efficiency improvement.
34
35### Keynesian Economics
36
37Keynesian theorists might stress how retained earnings could impact aggregate demand. Excessive retention at the expense of dividends might lower consumer spending, whereas judicious use could stimulate reinvestment and economic activity.
38
39### Marxian Economics
40
41From a Marxian perspective, retained earnings could be viewed as capital redeployed to generate further surplus value. This reinvestment could lead to either enhanced production capacities or more sophisticated methods of worker exploitation.
42
43### Institutional Economics
44
45Institutional economists would be interested in how retained earnings reflect company behavior norms, governance structures, and broader economic systems that maintain retained earnings as standard means for internal capitalization.
46
47### Behavioral Economics
48
49Behavioral economists study corporate decisions on retainable earnings in light of behavioral biases, organizational strategies, and managerial attitudes towards risk and growth potentials.
50
51### Post-Keynesian Economics
52
53Post-Keynesians might highlight how the decisions surrounding retained earnings affect long-term company stability, financial resilience, and reinforce the firm as an active entity within wider economic systems.
54
55### Austrian Economics
56
57Austrian economics emphasizes decentralized decision-making — observing that corporations accumulate retained earnings since they possess superior localized knowledge about their prospective project viability.
58
59### Development Economics
60
61In developmental contexts, retained earnings are crucial for under-resourced firms in emerging markets, relaying about internal capital formation vis-à-vis external credit restrictions.
62
63### Monetarism
64
65Monetarists might explore how retained earnings react vis-à-vis liquidity preference and interest rates, evaluating how corporate retained earnings impact broader money supply dynamics.
66
67## Comparative Analysis
68
69Comparing retained earnings across industries can reveal much about investment strategies, business maturity, and the economic climate. For example, technology firms might retain more earnings to invest in R&D, whereas mature conglomerates might distribute more to sustain shareholder value.
70
71## Case Studies
72
731. **Apple Inc:** Apple has consistently reinvested retained earnings into product development and market expansion.
742. **General Electric:** GE retained significant earnings historically to drive broad industrial investment, frequent enough to reflect substantial growth periods.
75
76## Suggested Books for Further Studies
77
78- "Financial Accounting Theory" by William R. Scott
79- "Corporate Finance" by Jonathan Berk and Peter DeMarzo
80- "Understanding Financial Statements" by Lyn M. Fraser
81
82## Related Terms with Definitions
83
841. **Dividend:** A portion of a company's earnings paid out to shareholders.
852. **Net income:** Total revenues minus total expenses, the bottom line profit of the company.
863. **Capital Expenditure:** Funds used by a company to acquire or upgrade physical assets such as property or equipment.
874. **Reserves:** Funds set aside by a company from profits for specific future expenses or as a cushion against unexpected costs.