Undistributed profits definition
/What are Undistributed Profits?
Undistributed profits are those earnings of a corporation that have not been paid out to investors in the form of dividends. A rapidly-growing business needs earnings to fund its future growth, and so will likely retain all of its earnings. Conversely, a slow-growth company has no internal need for the excess cash, and so will be more likely to pay out a large proportion of dividends.
How to Calculate Undistributed Profits
Undistributed profits are calculated by subtracting dividends paid from the corporation’s net income for a given period. The basic formula is as follows:
Undistributed Profits = Net Income – Dividends Paid
The calculation steps are noted below:
Determine net income. Find the company's total net income from the income statement for the period.
Identify dividends paid. Add up all cash and stock dividends paid to shareholders during the same period.
Subtract dividends from net income. The remainder represents the portion of earnings that the company retained rather than distributed — these are the undistributed profits.
These undistributed profits typically accumulate in the retained earnings section of the equity portion of the balance sheet.
Example of Undistributed Profits
Failsafe Containment builds reactor vessels. There is a rapidly-growing market for this product in some countries, so the company’s managers have decided to retain all profits within the business, in order to fund that growth. In its most recent year of operations, Failsafe generated $10 million of profits, all of which it elected to retain. The $10 million can be considered undistributed profits.