Retained Earnings

Retained earnings is the running total of every profit the company has earned, minus every loss and every dividend or distribution paid out, since the day it was formed. It sits in the equity section of the balance sheet and functions as a company's financial autobiography: large positive retained earnings say the business has historically made money and reinvested it; negative retained earnings (an accumulated deficit) say cumulative losses or distributions have exceeded cumulative profits.

For credit analysis, retained earnings carries signal that a single year's income statement cannot. A five-year-old company with strong current profits but a large accumulated deficit spent its early years burning money — and its equity cushion is thinner than the current P&L implies. The Altman Z-Score weights retained earnings-to-assets for exactly this reason: it captures both cumulative profitability and the company's age and reinvestment discipline in one ratio.

In closely held pass-through entities, read retained earnings alongside distributions. S-corp owners legitimately distribute cash to cover personal taxes on pass-through income, but distributions consistently exceeding net income drain the cushion year after year. A flat or shrinking retained earnings line in a profitable company means the owners are harvesting, not building — relevant when you are effectively lending that company money on open account.