Retained Earnings represent the portion of a company's profits that has been reinvested back into the business rather than distributed to shareholders as dividends. Over time, these earnings accumulate, reflecting the company's decision to allocate past profits towards growth, debt reduction, or savings for unforeseen circumstances. This financial figure is calculated by adding net income to the prior period's retained earnings and subtracting any dividends paid out to shareholders. For example, if a company earns $1 million in profit and chooses to distribute $200,000 as dividends, the remaining $800,000 will add to the retained earnings. Retained earnings are reported in the equity section of the company's balance sheet and can indicate the financial health, growth potential, and management decisions of the company. For instance, a company might use its retained earnings to fund a new product launch or expand its facilities, showcasing the funding's critical role in strategic planning. While a positive retained earnings balance is often a sign of strong performance, excessive accumulation might also suggest an opportunity for returning value to shareholders through dividends or buybacks, if permitted by corporate policies.