Retained earnings are earnings reinvested into a company to pay down debt or help it grow. A company may use its retained earnings to grow by investing in various capital projects that show a high probability of success. When a company’s stock price increases, its EPS (earnings per share) also increase. For investors, this is a sign that the company is making efficient use of its retained earnings. If EPS is not increasing, it may be a sign that the company isn’t making the most use of its retained earnings. In that case, investors will expect a dividend, given the lack of appreciation in the stock price. A company with a static or declining stock price that does not pay dividends may find it difficult to attract investors.
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