Retained Earnings Calculator

1. What is the Retained Earnings Calculator?

Definition: This calculator computes retained earnings ($ RE $), dividends distributed ($ DD $), and retained earnings per share ($ REPS $), which reflect the portion of net income retained by a company after dividends.

Purpose: Helps businesses and investors assess how much profit is reinvested for growth or reserved, and compare retention across companies via $ REPS $.

2. How Does the Calculator Work?

The calculator follows a four-step process to compute retained earnings metrics:

Formulas:

$$ DD = NI \times DPR $$

$$ RE = NI - DD $$

$$ REPS = \frac{RE}{NSO} $$

Where:

$ DD $: Dividends Distributed (dollars)
$ RE $: Retained Earnings (dollars)
$ REPS $: Retained Earnings per Share (dollars per share)
$ NI $: Net Income (dollars)
$ DPR $: Dividend Payout Ratio (decimal)
$ NSO $: Number of Shares Outstanding (shares)

Steps:

Step 1: Determine $ NI $. Input the most recent net income from the income statement.
Step 2: Determine $ DPR $. Input the dividend payout ratio as a percentage.
Step 3: Calculate $ DD $. Multiply $ NI $ by $ DPR $.
Step 4: Calculate $ RE $. Subtract $ DD $ from $ NI $.
Step 5: Determine $ NSO $. Input the number of shares outstanding.
Step 6: Calculate $ REPS $. Divide $ RE $ by $ NSO $.

3. Importance of Retained Earnings Calculation

Calculating retained earnings is crucial for:

Reinvestment Strategy: Shows funds available for growth, debt reduction, or reserves.
Shareholder Value: $ REPS $ allows comparison of retention efficiency across companies.
Financial Stability: Indicates a company’s ability to retain profits for future use.

4. Using the Calculator

Example 1 (Company Alpha): $ NI = \$1,000,000 $, $ DPR = 30\% $, $ NSO = 500,000 $:

Step 1: $ NI = \$1,000,000 $.
Step 2: $ DPR = 30\% = 0.30 $.
Step 3: $ DD = 1,000,000 \times 0.30 = \$300,000 $.
Step 4: $ RE = 1,000,000 - 300,000 = \$700,000 $.
Step 5: $ NSO = 500,000 $.
Step 6: $ REPS = 700,000 / 500,000 = \$1.40 $.
Results: $ DD = \$300,000 $, $ RE = \$700,000 $, $ REPS = \$1.40 $.

Retained earnings of $700,000 and $1.40 per share indicate strong retention for Company Alpha.

Example 2: $ NI = \$500,000 $, $ DPR = 20\% $, $ NSO = 250,000 $:

Step 1: $ NI = \$500,000 $.
Step 2: $ DPR = 20\% = 0.20 $.
Step 3: $ DD = 500,000 \times 0.20 = \$100,000 $.
Step 4: $ RE = 500,000 - 100,000 = \$400,000 $.
Step 5: $ NSO = 250,000 $.
Step 6: $ REPS = 400,000 / 250,000 = \$1.60 $.
Results: $ DD = \$100,000 $, $ RE = \$400,000 $, $ REPS = \$1.60 $.

Retained earnings of $400,000 and $1.60 per share suggest moderate retention.

Example 3: $ NI = \$800,000 $, $ DPR = 50\% $, $ NSO = 400,000 $:

Step 1: $ NI = \$800,000 $.
Step 2: $ DPR = 50\% = 0.50 $.
Step 3: $ DD = 800,000 \times 0.50 = \$400,000 $.
Step 4: $ RE = 800,000 - 400,000 = \$400,000 $.
Step 5: $ NSO = 400,000 $.
Step 6: $ REPS = 400,000 / 400,000 = \$1.00 $.
Results: $ DD = \$400,000 $, $ RE = \$400,000 $, $ REPS = \$1.00 $.

Retained earnings of $400,000 and $1.00 per share indicate balanced dividend and retention policies.

5. Frequently Asked Questions (FAQ)

Q: What are retained earnings?
A: Retained earnings ($ RE $) are the portion of net income kept by the company after paying dividends.

Q: How is DPR used?
A: The dividend payout ratio ($ DPR $) determines the percentage of earnings distributed as dividends, affecting $ RE $.

Q: Can REPS be negative?
A: Yes, if net income is negative or dividends exceed earnings, $ RE $ and thus $ REPS $ can be negative.