Company generally does not distribute all its earnings amongst the shareholders as dividends. A portion of the net earnings may be retained in the business for use in the future. This is known as retained earnings.
Merits:
- Retained earnings is a permanent source of funds available to an organisation.
- It does not involve any explicit cost in the form of interest, dividend or float at ion cost.
- As the funds are generated internally, there is a greater degree of operational freedom and flexibility.
- It enhances the capacity of the business to absorb unexpected losses.
- It may lead to increase in the market price of the equity shares of a company.
