What are retained earnings?

Retained earnings refer to the portion of a company's profits that are not distributed to shareholders as dividends but are instead retained within the company for reinvestment or to strengthen the company's balance sheet. This retained amount is typically used for funding various initiatives such as new projects, paying down debt, or maintaining adequate cash reserves. Retained earnings are essential for a company's growth since they provide an internal source of capital that can be used for expansion without incurring debt or diluting ownership through issuing new shares.

The correct choice accurately reflects this concept by emphasizing that retained earnings are the profits kept by the company after dividends have been paid to shareholders, demonstrating a strategic financial decision aimed at long-term growth and stability.