A corporation has a large balance in retained earnings. Does that mean that its dividends to stockholders will be increasing?
Not necessarily. The balance in retained earnings means that the company has been profitable over the years and its dividends to stockholders have been less than its profits. It is possible that a company with billions of dollars of retained earnings has very little cash available today.
One possible explanation for the small amount of cash in relation to the retained earnings is that the company invested in new plant assets in order to expand its operations. Rather than distributing the company’s cash to its stockholders, the company used the cash to pay for the factory and equipment in order to meet demand for its new product line.
Corporations might have a stated policy on dividends. For example, a corporation might pay dividends equal to approximately 40% of its earnings. Another corporation might have a plan to increase the amount of dividends each year by more than the rate of inflation. A new corporation might pay no dividends until its ratio of debt to equity is a specified percentage.
Gain more insight between the relationship between cash and net income with Cash Flow Statement.
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Earnings is actually income before tax
hmm not necessarily. it means that the company is keeping it’s net income / retained earnings as part of “apprpriated retained earnings” that will be invested. Let’s say that the company is planning to buy non-current asset for the company’s expansion.
Thanks alot for this information, I enjoyed reading about corporations they are very misunstand, and they involved in a lot of things, and they are very profitable.
Corporate have plan investment for new plant or they want to increase thier capital by giving Stock Dividend from Retained earninngs .