Retained Earnings is a surplus of cash that can be reinvested back into the business to improved the long-term economic picture of the company. After the company has paid for dividends and stock buybacks, the rest of the money is added to the Retained Earnings pool. If the company makes money, the Retained Earnings is added to the total accumulated earnings from all prior years. If the company loses money, the loss is subtracted.
Retained Earnings is where the growth rate of the company is calculated. The growth rate is an indicator of a company's Durable Competitive Advantage. The higher the growth rate, the better.
Retained Earnings will also help a company survive a recession. During a severe economic downturn, add Cash & Equivalents to Retained Earnings and check if the total is significantly greater than Total Current Liabilities.
Equations
Check if the company has Retained Earnings:
Check if Retained Earnings is growing over the years:
Determine the Retained Earnings growth rate:
During a recession check if the company has enough cash to survive:
