Retained earnings

Retained earnings - it can be a synonym of a profit, which stays in the company. Usually, when the company is earning profit, part of it is used to finance important concerns of the company and the other part, stays in the company for further growth and investments. That part of a profit, which is carried forward to the next year and used for improving company’s competitiveness, is called retained earnings.

To understand it clearly, let’s say, that the company earned some of Net Income. It is the same income, taken from the company’s profit/loss statement, which is calculated when deducting cost of sales, operating and financial expenses from the received sales. That profit can be used in many different ways - it can be committed to the reserves for buying own shares, committed to the reserves, which is used to compensate the losses of the company. It can also be paid as dividends for shareholders and for yearly bonuses for the board of directors and company employees and other purposes. Everything what left from these expenses is retained earnings. It is under shareholders’ equity in the balance sheet. Usually it is used for investments or for paying the debt of the company.

Contribution margin

Contribution margin - is the ratio of operating leverage. This ratio is the percentage of a firm's marginal profit per unit sale and it’s calculated by dividing contribution margin by firm’s sales. This ratio is very useful when calculating which part of sales is contributed to profit and fixed costs and has plenty of examples to show how this ratio works in reality.

First of all, we should understand what the contents of the contribution margin formula are. The denominator of the formula is the total revenue of the company, taken from the profit and loss statement. For the numerator stands contribution margin, that is calculated by decreasing sales with variable costs.  If you multiply it by 100%, the result of this formula shows what percentage of the sales is dedicated to cover fixed costs and to earn profit. The higher ratio shows that the company has more abilities to sell a product with lower variable costs.

Return on Equity

Return on Equity - is one of the most important ratios, showing profitability of the company. It shows how profitable the money of investors are being used in the company and what wealth they are bringing to the investor. This ratio shows how much of the profit belongs for the shareholders equity. The ratio is calculated by dividing net income by equity. Equity is the difference between the assets in the company and its liabilities and they are taken from a balance sheet.

If the company has big loans, then liabilities are very large in the company, so the equity part, in comparison with liabilities, is lower. If the liabilities are needed to pay interest, it will decrease the profit of the company. Other factor is sales - if the sales are getting low, it means that for the same fixed costs and product prices, the profitability of the company will go down. As you can understand, for the calculation of this ratio a lot of factors are included.