Question

State the objectives of ploughing back of earnings

Answer 1

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Here's your answer!!

Importance of Ploughing back/Retained of profits: -

1. No Dilution of Control: -Retained earnings do not dilute the control over the working of the firm. The control remains with the existing shareholders. However, rising of more equity capital from the market dilutes owner’s control.

2. Improvement of overall performance: -The Retained earnings can be utilized for expansion and modernization, which in turn can improve the overall performance of the organisation.

3. No Interest Burden: -There is no cost of financing the Retained earnings. However, there is interest burden if the funds are obtained through fixed deposits and debentures.

4. Flexibility for Utilising Funds: - There is lot of flexibility for utilizing the funds. The management can utilize the funds either for working capital or fixed capital.

5. Investors’ Confidence: - Retained Earnings indicate a healthy practice on the practice of the company. Therefore, investors develop confidence in such companies.

6. Increase Net Worth: - Retained Earnings increase net worth of a company. Net worth means equity capital + Free Reserves. The higher the net worth, the greater is the credit worthiness of the company.

7. Buy-back of shares: - The Retained Earnings (Free Reserves) can be used for buy back of shares. The buy back is allowed under Indian Companies Act, in order to reduce the chance of hostile take-over.

8. Reputation: - Retained Earnings improves image of the company. It improves credit worthiness of a company. Due to retained earnings, a company can easily obtain additional funds for expansion and modernisation.

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