Net income is the profit left over after all expenses, including taxes, have been paid. Retained earnings are the net income that has not been paid out to shareholders as dividends. Dividends are the portion of net income that is paid out to shareholders. Understanding how these three financial figures are related is crucial for assessing a company’s financial health.
The net income of a company can be calculated by adding the dividends paid out to shareholders to the retained earnings for the period. Conversely, retained earnings can be calculated by subtracting the net income from the dividends paid out. Dividends, on the other hand, are typically declared as a fixed amount per share and are paid out of the net income available after all other expenses have been met.