======Revenue Reserve======
A Revenue Reserve (often called [[Retained Earnings]] in the United States) is a company’s piggy bank of accumulated profits. Imagine a business earns $1 million in profit after tax. It might decide to pay out $300,000 to its owners ([[shareholders]]) as a [[dividends|dividend]] and keep the remaining $700,000. This $700,000 is added to the revenue reserve. This reserve is the cumulative total of all the profits the company has earned and kept over its entire history, minus any losses. Crucially, these are **distributable** profits, meaning the company’s management //could// legally pay them out to shareholders in the future. This makes them different from a [[capital reserve]], which arises from non-operating activities (like revaluing an [[asset]]) and typically cannot be distributed as cash dividends. In short, a revenue reserve is a historical record of a company's success and its decision to reinvest in itself.
===== Why Do Revenue Reserves Matter to an Investor? =====
Think of a company’s revenue reserve as its financial engine room. For a [[value investor]], analyzing its size and growth trajectory provides critical insights into the health and potential of a business.
==== A Sign of Profitability and Health ====
A consistently growing revenue reserve is the clearest evidence that a company is profitable over the long term. A business that constantly loses money will have a shrinking or even negative reserve, which is a major red flag. It shows that the company has a durable business model capable of generating more cash than it consumes. This historical profitability is a cornerstone of a sound investment.
==== Fuel for Future Growth ====
These retained profits are not just idle cash; they are the primary source of funding for a company's future. A savvy management team can use this capital to:
  * **Innovate:** Fund research and development ([[R&D]]) to create the next blockbuster product.
  * **Expand:** Build new factories, open stores in new markets, or upgrade technology to become more efficient.
  * **Acquire:** Buy other companies to gain market share or new capabilities through [[mergers and acquisitions]] (M&A).
  * **Strengthen the Balance Sheet:** Pay down debt, reducing interest costs and financial risk.
  * **Reward Shareholders:** Fund [[share buybacks]], which can increase the value of remaining shares.
==== A Financial Safety Cushion ====
A healthy revenue reserve acts as a buffer during tough times. When a recession hits or a company has a bad year, it can dip into these reserves to cover losses, continue investing, or maintain its dividend without having to take on expensive debt or issue new stock (which would dilute your ownership).
===== Where to Find Revenue Reserves =====
You can find the revenue reserve on a company’s [[balance sheet]], which is a snapshot of its financial health at a single point in time. It is a key component listed under the **[[Shareholder's Equity]]** section.
Remember, terminology varies. In financial statements prepared under US [[GAAP]] (Generally Accepted Accounting Principles), you will almost always see it labeled **‘Retained Earnings’**. Under [[IFRS]] (International Financial Reporting Standards), more common in Europe, you might see ‘Revenue Reserve’ or ‘Accumulated Profits’.
To understand how it changes, you need to look at two other statements:
  * The [[income statement]] shows the [[net income]] (profit) for the period.
  * The [[statement of cash flows]] or statement of changes in equity will show how much of that net income was paid out as dividends.
The basic formula is simple:
**Ending Revenue Reserve = Starting Revenue Reserve + Net Income - Dividends Paid**
===== The Value Investor's Perspective =====
For a value investor, the existence of a revenue reserve is just the starting point. The real question is: **How well does management use it?**
=== Judging Management's Skill ===
The legendary investor [[Warren Buffett]] famously argued that retaining a dollar of profit only makes sense if the company can turn it into //more// than a dollar of market value for its shareholders. A value investor must act like a detective, examining the company’s history. When management retained profits in the past, did it lead to higher earnings and a stronger business? You can measure this by looking at metrics like [[Return on Invested Capital]] (ROIC). High and consistent returns suggest a skillful management team. Low returns suggest they are squandering your potential dividends.
=== Hoarding Cash vs. Smart Reinvestment ===
A massive pile of retained earnings isn't always a good thing. If a company has huge reserves but its growth has stalled and its returns are low, it could be a sign of a complacent management team that is hoarding cash instead of either investing it effectively or returning it to its rightful owners—the shareholders. A great business finds opportunities to reinvest its earnings at high rates of return. A mediocre one just lets the cash pile up.