Retained earnings are the profits that a company has earned to date, less any dividends or other distributions paid to investors. a company cumulative earnings since the corporation was formed. In most cases, companies retain earnings to invest them into areas where the company can create growth opportunities, such as buying new machinery or spending the money on more research and development.
Formula for retain earning:
Beginning retained earnings + Profits/losses - Dividends = Ending retained earnings
Benefits have of having retained earnings is companies to have financial resources to reinvest in their operations, creating growth. Retained earnings fund several projects such as research and development and facility construction, renovation and expansion. Companies also use retained earnings to purchase equipment and other assets as well as pay off company debts and liabilities.
What Horizontal Analysis does is compare the net income of the current period with the net income of the prior period.
This Analysis is used to determine how a company is growing overtime. Also to compare a company's growth rates in relation to its competitors and industry.
The formula for Horizontal Analysis has two process:
First you have to establish if the company net income increase or decrease from the prior year to the current year:
(Net income Current Year)-(Net income Prior Year)=(Increase or Decrease Amount)
Than you would divide the difference of increase or decrease amount to the prior year net income.
Difference of Increase or Decrease Amount/Net Income Prior Year=Percent Amount
This would give you the percentage of the company growth rate.
Here’s an example how to use the horizontal Analysis:
Ratio of Liabilities to Stockholders' Equity Formula
Description: Analyzing the ability of a company to pay its creditors.
Total Liabilities/Total Stockholder’s Equity=Ratio of Liabilities to Equity.
Why is this formula important to analyze?
The Ratio of Liabilities to Stockholder’s Equity is important to analyze because is measures the degree which the assets of the business are financed by the debt and the shareholders equity of the business.
Both total liabilities and stockholders’ equity figures are obtained from the balance sheet of a business. Lower values of the ratio are favorable indicating less risk. Higher ratio is unfavorable because it means that the business relies more on external lenders; a higher risk.
For example, let say we were analyzing Company A, B, and C.
Company A shows favorable results since there ratio is lower than the other company on the list. It shows that there assets are financed more with investors or the owner cash. Company B show unfavorable results because they are using more of a credit line to support their business. They show more of risk because they need to pay off the lenders to keep them from defaulting on their payments. Company C is doing alright since there ratio is not extremely high and show that they can continue to operate without much credit.
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