Retained EarningsFinancial Statements
After you’ve deducted all expenses from sales you reach the retained earnings section of the income statement. This section looks at the amount of money payable to shareholders and kept within the bank. This is especially important on a per share value since they strengthen your returns on a per share basis. You want to see upwards trends in all subsections of this section.
Dividends list the total value of payments given to those who own preferred, and sometimes common, shares or stock. This is an annual payment that must be made every year to investors who hold preferred shares. If dividends are not paid each year it accrues until it is paid in full. The higher the amount of externally owned preferred shares, the higher this number will become year over year.
Retained Earnings or Additions to Paid-In Capital
Retained earnings are the amount of profit kept within the company. The full value of this section is added to the retained earnings section of the balance sheet under shareholder’s equity. Retained Earnings is the full amount the company can use to invest in its future operations or investments without being forced to absorb the costs of interest or diluting investor’s shares. This only occurs after every other expense and option have been paid. The higher this number is the better for the company. It increases the strength of internal financing in the future. You should seek out businesses with higher Retained Earnings than their competitors, indicating a strong advantage. It also indicates that the firm uses the money that has been invested in building a self-financing company over time. If a business can get this number closer to 30% it’s a great sign, as long as the firm isn’t taking unnecessary risks to get there.
Do not review only Retained Earnings or Additions to Paid-In capital. In addition to overall earnings, you should look at the Earnings on a Per Share basis. Higher earnings per share increase the value of each actual share. To determine per share earnings, a company’s dividends to preferred stock is subtracted from net income, and the remainder is divided by the average shares outstanding. This delivers the actual earnings per share. There is an important notice for you here. Per-share earnings need to show a constant and consistent upward trend over time. Like net earnings, it is better to have a year over year increase than finding rising and falling earnings per share. A constantly rising earnings per share indicates a stronger company. It is important to note this figure can be distorted rather easily by share buyback programs. The fewer shares that are outstanding, the fewer shares net income is divided by. The result is higher Per-Share earnings simply by manipulation of shares on the market. If per-share earnings are increasing, check net income to make sure it is also increasing.
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