Retained Earnings

Every dollar of profit a company has ever earned and not paid out as a dividend accumulates in retained earnings. The account grows by net income and shrinks by dividends each period — a running total of everything earned and reinvested since inception, sitting inside shareholders' equity.

The line is a scorecard for capital allocation. Buffett's test: every dollar retained should create at least a dollar of market value, or the money should have been paid out instead. A company with decades of accumulated retained earnings and a stagnant valuation has been reinvesting shareholder money at poor returns.

An accumulated deficit — negative retained earnings — is normal for young companies still running losses; at a mature company it usually marks large past writedowns.