Retained Earnings: Formula, a Real 10-K Worked Example, and Why It Is Not Cash

Michael Whitman · Trading since 2017, full-time since 2020 · YouTube creator, 137K subscribers · Published 2026-09-06 · Updated 2026-11-02 · Reviewed 2026-11-01

Retained earnings is every year’s kept profit added up, and it is a record of what was kept, not money in the bank. Microsoft’s balance rose $90,534 million in its 2026 fiscal year while its cash fell, and at the end of 2025, 61.37% of the 5,877 companies reporting the line to the SEC showed a negative balance.

The definition fits in one sentence; reading the number takes more. This page works the formula line by line on a real annual report, shows the buyback line the usual formula leaves out, and measures how far the balance sits from cash across 1,504 large companies.

How it works

The calculation is one line. Opening balance, plus this year’s profit, minus dividends declared, minus any other charges the company books here, equals the closing balance. Every year the result carries forward. Retained earnings build from what is left of operating income after interest and tax; 74 of 1,187 large SEC filers went from an operating profit to a loss between fiscal 2024 and 2025.

The “other charges” are mostly buybacks. The formula printed in most guides is opening balance plus net income minus cash and stock dividends. A company that retires the shares it repurchases charges much of their cost here as well, and for a large buyer that line can be bigger than a year’s dividend growth.

It is cumulative, which is what makes it different from every income statement line. Revenue and profit describe one period; retained earnings describes every period the company has ever had.

It is not a cash balance, and this is the point that is easy to misread. Retained earnings records that profit was kept; the cash line records what is in the bank. The money went into machinery, stock, a building, paying down borrowing or buying back shares, all of which appear elsewhere on the balance sheet.

Where it sits and how it moves

It is one component of shareholders equity. The others are paid-in capital, treasury stock and accumulated other comprehensive income, and together they are what is left after liabilities are subtracted from assets. It is equity, never an asset and never a liability.

A negative balance has its own name: accumulated deficit. It can mean the company has lost more over its life than it has made, which is normal for a young business. It can also mean the company has handed back more than it earned, which is what happened at Apple.

Dividends reduce it directly. Whether a company may legally pay a dividend is set by the law of the state it is incorporated in, and those tests are not simply “dividends up to the retained earnings balance”: Apple paid $15,421 million in dividends in its 2025 fiscal year while carrying an accumulated deficit at both ends of that year.

Buybacks take two different paths. Some companies hold repurchased shares as treasury stock, a separate negative line in equity, and leave retained earnings alone. Others retire the shares and charge much of the cost to retained earnings. Amazon and Coca-Cola report treasury stock; Apple and Microsoft report none.

A worked example: Microsoft’s fiscal 2026, line by line

Microsoft’s 10-K for the year to 30 June 2026 prints the whole calculation in its statement of stockholders’ equity, in millions of dollars:

Check it by hand: $237,731 + $133,749 = $371,480; minus $27,034 is $344,446; minus $16,181 is $328,265, the figure on the balance sheet. The textbook formula stops at $344,446 and misses by $16,181 million.

The buyback was split across two lines. Microsoft repurchased $22,286 million of stock in the year; it charged $6,105 million to common stock and paid-in capital and the other $16,181 million, 72.61%, to retained earnings. A company that held the shares as treasury stock instead would show a higher retained balance for the same economics.

Two ratios come straight out of the table. Dividends were 20.21% of net income, the payout ratio, and 67.69% of the year’s profit stayed in the account after dividends and the buyback charge. Against paid-in capital of $117,406 million, retained earnings made up 73.66% of the two combined, so most of Microsoft’s book equity was generated by the business rather than raised from investors.

Now set it against cash. The same 10-K shows cash and cash equivalents of $30,242 million at the start of the year and $20,935 million at the end, a fall of $9,307 million in a year retained earnings rose $90,534 million. Additions to property and equipment were $115,948 million: the kept profit went into data centers, not into the bank. Even cash plus short-term investments, $76,843 million, came to 23.41% of the retained balance.

In practice: what the balance tells you

A company reinvesting everything keeps all of its profit. The balance climbs quickly and no dividend is paid, which is the standard pattern for a business with places to put the money.

A mature company pays most of it out. The balance grows slowly, the dividend is large, and the implied message is that the business has fewer attractive uses for its own cash than its shareholders do.

Corrections to prior years arrive as an adjustment to the opening balance, not as a change to this year’s profit, which is where errors from earlier periods get absorbed. Read the note that explains any restated opening figure.

The original data

Five large companies, as filed. The figures below come from each company’s latest annual report on form 10-K, read from the SEC’s XBRL company facts on 3 October 2026. All amounts are in millions of US dollars as tagged by the company. “Other” is accumulated other comprehensive income or loss, and for every company it equals stockholders’ equity minus the other three columns exactly.

Paid-in capital here is common stock at par plus additional paid-in capital; Apple and Microsoft report the two as one line. Each row adds up: for Coca-Cola, $22,341 + $80,382 - $56,423 - $14,131 = $32,169 million.

The spread is the lesson. The same line runs from -19.35% of equity at Apple to 249.87% at Coca-Cola. Coca-Cola’s figure is above 100% because it holds $56,423 million of repurchased shares as treasury stock, a negative that sits beside the retained balance and pulls total equity below it.

Tesla is the deficit that closed. Its retained earnings were negative at every year-end from 2011 to 2020 in its 10-K filings, deepest at -$6,083 million on 31 December 2019, and first turned positive at $331 million on 31 December 2021. Four years later the balance was $39,003 million.

Apple is the deficit that opened. Its balance peaked at $104,256 million in 2013, was still $5,562 million at 25 September 2021, and first went negative at -$3,068 million on 24 September 2022. It was negative at all four year-ends from 2022 to 2025, a stretch that includes net income of $112,010 million in fiscal 2025, because Apple retires the shares it buys back. Every year is in the year-by-year file and the company table.

Is Microsoft’s gap between retained earnings and cash unusual? It is the norm. The SEC’s XBRL frames service returns one value per company for a concept at a calendar date, the balance sheet date that best aligns with it. Downloaded on 1 Nov 2026 for the end of 2025, 1,522 companies reported both retained earnings and $1 billion or more of stockholders’ equity, and 1,504 of them also reported cash and cash equivalents (209 only in a total that includes restricted cash, used where it is the only figure).

Of the 1,122 with a positive balance, the median held cash equal to 21.15% of it, and 612 of them, 54.55%, held less than a quarter. Only 155, 13.81%, had cash at least as large as the retained balance. Another 377 reported a deficit, and 93 of those still held $1 billion or more of cash, which is the same point from the other side. The frame values are quarter-end figures for companies whose year ends elsewhere, so Microsoft appears at 31 December 2025, with $24,296 million of cash against $280,789 million retained (8.65%). Every company is in the cash table.

Across every filer, a deficit is the common case. In the same download, 5,877 companies reported retained earnings for the end of 2025 and 3,607 of them, 61.37%, reported an accumulated deficit, against 52.13% at the end of 2010. Among the 1,522 with $1 billion or more of equity, 380 did, 24.97%, up from 16.41% (158 of 963) in 2010, and the share has been above 20% at every year end since 2015.

The all-filer count includes young companies, shells and blank-check companies that have never booked a profit, which helps explain why it sits so much higher. Tesla’s value in the frames, $39,003 million, matches its 10-K figure in the table above. Every year is in the filer table.

When it fails as a signal

A large balance built decades ago says little about the business today. The profits were made under different management in different conditions, and the assets they bought may be worth a fraction of their carrying value.

A second trap is comparing the balance across companies of different ages. An older company has had more years to accumulate, so the absolute figure says as much about age as about quality.

A third is reading a deficit without asking where it came from. Tesla’s came from losses; Apple’s came from returning more cash than it earned. The same negative sign covers both, and it is not rare: at the end of 2025 a quarter of filers with $1 billion or more of equity carried one, Apple among them at its 27 December 2025 quarter end, with a deficit of $2,177 million.

A fourth is ignoring the buyback method. A company holding treasury stock and one retiring shares can report very different retained balances for the same economics, as Coca-Cola and Apple show, and as Microsoft’s $16,181 million charge shows within a single year.

A fifth is treating the balance as money available to spend. Microsoft’s own year is the counterexample: the account grew by $90,534 million and the cash line shrank.

And a sixth is a sudden restatement. An opening balance revised downward is a correction to prior years, and the note behind it matters more than the new number.

Questions people ask

What is retained earnings in simple words?

The profit a company has kept, added up over its whole life, after paying dividends. Microsoft had kept $328,265 million of it by 30 June 2026.

What’s the difference between profit and retained earnings?

Profit is one year’s result; retained earnings is every year’s kept profit stacked together. Microsoft’s fiscal 2026 profit was $133,749 million, and only $90,534 million of it was added to the account after dividends and the buyback charge.

Is retained earnings an asset or equity?

Equity. It sits in the stockholders’ equity section of the balance sheet, beside paid-in capital. The assets it paid for are listed separately, which is why the two never match.

How do you calculate retained earnings?

Opening balance plus net income, minus dividends, minus any buyback cost charged to the account. The Microsoft table above runs it in full: $237,731 million in, $328,265 million out.

What are retained earnings used for?

Whatever the business spends on instead of paying shareholders: equipment, acquisitions, paying down debt or buying back shares. Warren Buffett’s 1983 letter to Berkshire Hathaway shareholders gave the test for whether keeping it was worth it: retention should, over time, deliver at least $1 of market value for each $1 kept.

Related

Shareholders equity is the section that holds this account alongside the others. Paid-in capital is what investors contributed, measured on the same five companies. And the balance sheet is the statement where every one of these figures is printed.

This page is educational, not financial advice. Test every idea on your own charts before risking money.