Final answer:
Retained earnings, which are part of a company's equity, increase equity when positive and decrease it when negative. The slope of earnings growth is important to investors, with a positive slope being preferred as it indicates increasing value, while the y-intercept represents the starting value of retained earnings.
Step-by-step explanation:
Retained earnings are a part of a company's equity, and they represent the amount of net income that is not distributed to shareholders as dividends. Instead, this income is retained to reinvest in the company or to pay off debt. If the retained earnings have a positive balance, they would be added to the owner's equity, thus increasing the total equity of the company. On the other hand, if there are losses, the retained earnings can decrease, thereby reducing equity.
Considering a stock investment, the slope of the earnings graph is critical. A positive slope indicates that the company's earnings are increasing over time, which generally contributes to an increase in the stock's value. Most investors would prefer a stock with a positive slope in its earnings trend, as it suggests a healthy, growing business. Conversely, a negative slope would indicate decreasing earnings, which could signal trouble and might lead a shareholder to consider selling the stock to avoid potential losses.
The y-intercept in this context refers to the starting value of retained earnings at the beginning of the period. The interpretation depends on the context of the business, but typically, a higher starting point might indicate a more established company with a history of profitability.