What can be inferred about the profitability of a business when its balance sheet shows retained earnings?

When a business shows retained earnings on its balance sheet, it indicates that the company has generated profit over time and has chosen to reinvest those earnings back into the business rather than distributing them to shareholders as dividends. Retained earnings reflect the cumulative net income that has been retained by the company for growth and development, showcasing a history of profitability.

Retained earnings serve as a vital indicator of a company’s financial health and its ability to fund operations without resorting to additional external financing. This accumulation of profits signifies that the company has not only been operational but also successful in generating more revenue than expenses consistently. This is a positive sign for potential investors, creditors, and stakeholders who analyze the company's long-term sustainability and growth potential.

In contrast, showing losses would not contribute to retained earnings but would instead reduce them, and indicating no outstanding debts does not directly relate to profitability. Furthermore, retained earnings do not correlate with the size of the asset base; a company can have a low or high asset base and still report retained earnings based on its net income history.