When you own stock in a company, it’s nice to get a consistent dividend, but it’s also good to see the company build up its own stash of money. Retained earnings are the profits a company has kept in its business since its beginning that it hasn’t paid out as dividends. A company that grows its retained earnings can use the additional money to expand its business. This can potentially lead to higher profits and increase the company’s value. You can calculate the increase in a company’s retained earnings each accounting period to see how much it adds to its reserves.
Locate a company’s statement of stockholders’ equity in its most recent Form 10-Q quarterly report or Form 10-K annual report. You can download these forms from the investor relations section of its website or from the U.S. Securities and Exchange Commission’s online EDGAR database.
Identify the amount of retained earnings the company had at the beginning of the period, the net income it generated during the period and the amount of dividends it paid to common and preferred stockholders. For example, assume a company had $100 million in beginning retained earnings, had $40 million in net income, paid $10 million in common dividends and paid $5 million in preferred dividends.
Add net income to the beginning retained earnings. Subtract the common and preferred dividends from your result to calculate the retained earnings at the end of the period. In this example, add $40 million to $100 million to get $140 million. Subtract $10 million and $5 million from $140 million to get $125 million in ending retained earnings.
Subtract beginning retained earnings from ending retained earnings to calculate the dollar increase in retained earnings during the period. In this example, subtract $100 million from $125 million to get a $25 million increase in retained earnings.
Divide the dollar increase in retained earnings by the amount of beginning retained earnings. Multiply your result by 100 to calculate the percentage increase in retained earnings. Concluding the example, divide $25 million by $100 million to get 0.25. Multiply 0.25 by 100 to get a 25-percent increase in retained earnings.
- A large increase in retained earnings might not always be a good thing. If a company lacks profitable growth opportunities for which it can use its additional retained earnings, it might benefit shareholders to distribute more of its profits as dividends instead of retaining them in the business.