what can retained earnings tell you 
retained earnings refer to the historical profits earned by a company minus any dividends it paid in the past 1 to get a better understanding of what retained earnings can tell you the following options broadly cover all possible uses that a company can make of its surplus money for instance the first option leads to the earnings money going out of the books and accounts of the business forever because dividend payments are irreversible all of the other options retain the earnings for use within the business and such investments and funding activities constitute retained earnings retained earnings are also called earnings surplus and represent reserve money which is available to company management for reinvesting back into the business when expressed as a percentage of total earnings it is also called the retention ratio and is equal to 1 the dividend payout ratio though the last option of debt repayment also leads to the money going out of the business it still has an impact on the business s accounts for example on saving future interest payments which qualifies it for inclusion in retained earnings profits give a lot of room to the business owner s or the company management to use the surplus money earned this profit is often paid out to shareholders but it can also be reinvested back into the company for growth purposes the money not paid to shareholders counts as retained earnings the decision to retain earnings or to distribute them among shareholders is usually left to the company management 2 however it can be challenged by the shareholders through a majority vote because they are the real owners of the company management and shareholders may want the company to retain earnings for several different reasons being better informed about the market and the company s business the management may have a high growth project in view which they may perceive as a candidate for generating substantial returns in the future in the long run such initiatives may lead to better returns for the company shareholders instead of those gained from dividend payouts paying off high interest debt also may be preferred by both management and shareholders instead of dividend payments on the other hand when a company generates surplus income a portion of the long term shareholders may expect some regular income in the form of dividends as a reward for putting their money into the company traders who look for short term gains may also prefer dividend payments that offer instant gains most often the company s management takes a balanced approach it involves paying out a nominal amount of dividends and retaining a good portion of the earnings which offers a win win 