UK Accounting Glossary
The Return On Retained Earnings formula compares the total amount of profit per share retained by a company over a given period of time against the change in profit per share over that same time period.
Using the formula for Return On Retained Earnings, an investor can determine whether it’s worth it for a company to keep its profits. A high percentage would indicate that a company would be better off reinvesting into the business, whereas a low one would show that paying out dividends may be in the best interests of the company.
A way to evaluate management effectiveness is to measure how much market value has been added by the company’s retention of capital. Impressive market value gains mean that investors can trust management to extract value from capital retained by the business.
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This glossary post was last updated: 22nd March 2020.