Understanding Capital Reserves- Their Definition, Importance, and Management

What is a capital reserve?

A capital reserve, also known as a retained earnings reserve, is a portion of a company’s profits that is set aside and not distributed to shareholders as dividends. Instead, it is retained within the company to be used for various purposes such as reinvestment, expansion, or to strengthen the company’s financial position. This reserve serves as a buffer against unexpected losses and helps ensure the long-term stability and growth of the business.

In this article, we will delve into the concept of capital reserves, their importance, and how they are calculated and utilized by companies. By understanding the role of capital reserves, investors, stakeholders, and business owners can gain valuable insights into a company’s financial health and its potential for future success.