The limitations of retained earnings are as follows :
- There is imbalanced growth as undistributed profits remain in the same industry.
- Since the profits of business fluctuate from time to time, it is an uncertain source of funds.
- Excessive retained earnings causes dissatisfaction amongst the shareholders as this reduces the amount of the dividend receivable by them.
- Frequent capitalisation of reserves may result in over capitalisation.
- Many firms fail to recognise the opportunity cost associated with these funds… This results in sub- optimal use of the funds.