Question

What is the Importance of Retained Earnings?

Answer 1

The company keeps a portion of its net income as reserves for potential future usage. We call this Retained Earnings. Ploughing back of profits is another name for this strategy of preserving money for later use.

Importance of Retained Earnings are:

1. A Permanent Source of Funds
2. No Explicit Cost of Funds
3. Operational Freedom and Flexibility
4. Loss Absorption
5. Appreciation in the Value of Shares