A company’s retained earnings are the share of its net income, after paying dividends and making distributions in payment of stock or debt, that is not paid out or reinvested in the business. Retained earnings increase on a company’s balance sheet with profits and decrease when shareholders withdraw funds.
Retained earnings are the accumulated portion of net income that a company has not paid out to shareholders. When a company makes net income, it has two choices: it can pay dividends to shareholders, or it can reinvest the profit in itself.
Retained earnings are how a company controls how it is managed and by whom. Shareholders often feel unduly rewarded for the risk that they take when buying stocks. They want to see their capital returned, and as such, dividends are seen as a safe way to return capital.