Retained Earnings MarginProfitability Ratios
The Retained Earnings Margin displays the portion of Net Earnings kept within the company for future self-financing. Select Retained Earnings from the Income Statement, and divide the figure given by sales revenue for the selected year, and multiply that number by 100.
Retained Earnings Margin shows the total of sales revenue, as a percentage, that the company has retained for self-financing and reinvestment towards growth. This is a powerful trend line which can display how much the firm values internal reinvestment versus external financing, especially compared with trend lines from external financing on the balance sheet or interest expenses on the Income Statement.
If this number is falling steadily while debts owed and Interest Expenses are rising, this may be an indicator of preference towards external finance over internal financing. It may additionally show Management is more concerned with paying dividends to shareholders than financing the company internally. This is not necessarily a bad thing if the company is already successful (think financial security on par with Microsoft or Facebook) and can afford to disperse net earnings as dividends. However, if the company is young or weakly positioned compared to competitors in its industry, the preference to paying dividends over the desire to finance the company internally may indicate bad prioritizing.
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