Merits : The merits of retained earning as a source of finance are as follows :
1. Retained earnings are a permanent source of funds available to an organisation.
2. It does not involve any explicit cost in the form of interest, dividend or floatation cost.
3. As the funds are generated internally, there is a greater degree of operational freedom and flexibility.
4. It enhances the capacity of the business to absorb unexpected losses.
5. It may lead to increase in the market price of the equity shares of a company.