Statement of Retained Earnings Ratios

Statement of Retained Earnings contains the ingredients to calculate only one ratio – a Dividend Payout Ratio – by dividing dividends accrued (declared) by net income for the same period. It reflects you dividend policy which is a part of your financial value monetization strategy.

You actually do not need this statement to calculate this ratio, though. You can take the amount of dividends from your cash flow statement (which is even better because it shows dividends actually paid) and your net income – from your income statement. So this statement is still pretty much useless for financial analysis purposes.

The traditional view is that a stable dividend payout ratio indicates a solid dividend policy by the company's board of directors. And a reduction in dividends paid is looked poorly upon by investors, and the stock price usually depreciates as investors seek other dividend-paying stocks.

Reality is, as usual, a little bit more complex. It is all about time value of money, actually. For example, if a private company is aiming at an IPO in the foreseeable future, it will definitely stop paying dividends as to get the most of its stock offering, it will need to reinvest all of its free cash flows into the company.

The same thing happens when a company sees a major expansion opportunity and needs to lay its hands on every dollar it can get to pursue it. Which means that you always have a choice – distribute your free cash flow as dividends or invest it into your business expansion. The choice that needs to be made based on financial KPI values generated by solid financial models.