Retained earnings are important for business analysis. It's a full overview of all earned net income from the start of business minus the all paid cash dividends.
Retained earnings are calculated as follows:
Beginning Retained Earnings + Net Income or Net Loss – Cash Dividends
The beginning retained earnings are the retained earnings from a previous business year. The Net Income is the total amount left after expenses are subtracted from revenues. And lastly, Cash Dividends are payments to stock owners.
Retained Earnings (RE) are a portion of a business's profits that are not distributed to shareholders as dividends, but are reinvested back into the business. As a rule, these funds are used for working capital and fixed asset purchases (capital expenditures) or to pay off debt obligations.
At the end of each accounting period, retained earnings are reported under the shareholder's equity section of the balance sheet. RE is calculated by adding the beginning RE balance to net income or reducing it by a net loss, then deducting dividend payouts. A statement of retained earnings, which highlights the changes in RE for a given period, is also maintained.