What do retained earnings represent in a business?

Retained earnings represent the portion of a company's profits that are not distributed to shareholders as dividends but are instead reinvested into the business. This reinvestment can take various forms, such as financing new projects, purchasing equipment, or paying down debt. The idea is that by retaining these earnings, the company can use the funds to support growth, increase operational capacity, and improve its overall financial health.

In the context of business finance, retained earnings serve as a key indicator of a company's ability to generate profit and manage its finances prudently. They denote a reinvestment strategy where the business prioritizes long-term financial stability and growth over immediate shareholder payouts. This aspect is critical for investors to understand, as it reflects a company's commitment to using its resources for enhancement rather than merely satisfying shareholders in the short term.