Final answer:
Retained earnings are the portion of a company's profits not distributed as dividends but kept and reinvested in the business, providing vital internal financial capital for growth and investment opportunities.
Step-by-step explanation:
Retained earnings, also known as undistributed profits, refer to the portion of a company's net profits which are kept within the company instead of being distributed to shareholders as dividends. These earnings are reinvested into the business and are used for a variety of purposes such as purchasing new equipment, investing in research and development, or expanding into new markets. Retained earnings are an important source of financial capital for a company, particularly for those who have fewer external sources of funding or are looking to minimize debt.
Profits can be a vital source of funding for companies, especially those well-established with consistent revenues, enabling them to finance their own growth and investment opportunities. However, companies also have the option to obtain capital through borrowing using banks and bonds, which becomes feasible when they have a track record of significant revenues or profits. This flexibility is important as it allows companies to continue investing, even during periods of low profitability, ensuring they can survive until financial conditions improve.