In the process of investment, shareholders' equity is an important reference for judging the operation status of a company. When analysing shareholders' equity, reference is made to share capital, capital reserve and retained earnings. However, when analyzing the retained earnings in detail, the amount of surplus cannot be used as a standard for judging the operation status of the enterprise. Next, let's take a look at the reasons for the lack of retained surplus.
Insufficient profit
The most important reason for the decrease in the company's retained earnings when the profit is insufficient. When a company's profitability decreases over a period of time and it needs to operate through the accumulation of past earnings, the total amount of its retained earnings is bound to decrease. The value of the company cannot be a castle in the air, without the actual value support, no amount of decoration can hide its precarious appearance.
Conversion of surplus into capital increase
When an enterprise is in a period of rapid development, due to its limited capital scale, in order to expand the scale of investment, it often chooses to convert the profits of the previous period into equity to increase the value of the company. This method can help enterprises release more positive development signals in the market, and can also reasonably avoid taxes to a certain extent, accelerating the development of enterprises.
Dividends to shareholders
When the company's operation entered a stable period, although it was still in a profitable state, its market share had reached its peak. Blindly expanding production will inevitably lead to a decline in profit margins and a change in the attitude of shareholders towards investment. In the absence of investment opportunities, companies can increase their trust in the company by distributing a portion of their profits to shareholders in the form of dividends.
This kind of feedback can alleviate shareholders' nervousness about declining profits and maintain the stability of stock prices. Moreover, if the retained surplus is excessive, it will itself be taxed more. Through dividends, enterprises can not only reduce the tax ratio, but also gain more goodwill from shareholders.
The amount of retained earnings cannot be used as a standard for judging the operating status of a company, but requires a comprehensive analysis of the company's current market performance and development trends.
Risk Warning: This article only represents personal views and advice, and does not constitute investment or advice under any circumstances.