Retained earnings are the portion of a company's net income that is kept or 'retained' by the company rather than being paid out as dividends to shareholders. This money is typically reinvested back into the business for growth, such as funding research and development, paying off debt, or expanding into new markets.
While the above formula gives a basic understanding, the concept of retained earnings is more nuanced. Retained earnings are part of a company's equity and are owned by its shareholders, even though they are not distributed as dividends. It serves as an important measure of a company's ability to fund its own operations and growth without relying on outside financing.
Retained earnings can be negative, which is often referred to as an 'accumulated deficit'. This can happen when a company has more net losses or dividends than net income.
It's also important to note that just because a company has 'high' retained earnings, it doesn't necessarily mean the company is financially healthy. It could mean that the company doesn't have profitable investment opportunities and therefore, is not using its earnings effectively.
For Amazon, retained earnings are calculated by subtracting dividends (which is usually zero as Amazon typically doesn't pay dividends) from the sum of its beginning retained earnings and net income. It has consistently high retained earnings, which it uses to fund growth and expansion projects.
Apple's retained earnings are calculated in a similar manner. However, unlike Amazon, Apple does pay dividends, so its retained earnings are lower. These earnings are used for things like research and development, and other capital expenditures.
For Tesla, retained earnings have often been negative due to its consistent net losses in its early years. However, as the company becomes more profitable, it has begun to see positive retained earnings, which are reinvested into new projects and paying down debt.