Capitalization Of Profits

AAA

DEFINITION of 'Capitalization Of Profits'

Converting a company's retained earnings, which represent the profits held in the business over time, to capital. The capitalization of profits process involves issuing a stock dividend, or bonus shares, to existing shareholders. This allocation is done on the basis of their existing share holdings, similar to a rights issue.

INVESTOPEDIA EXPLAINS 'Capitalization Of Profits'

Capitalization of profits has no impact on shareholders' equity or book value, since it merely transfers funds from retained earnings to paid-up capital. A company may choose to capitalize profits for a number of reasons, such as providing an immediate reward to shareholders or conserving its cash resources.

RELATED TERMS
  1. Capitalization

    1. In accounting, it is where costs to acquire an asset are included ...
  2. Paid-Up Capital

    The amount of a company's capital that has been funded by shareholders. ...
  3. Retained Earnings

    The percentage of net earnings not paid out as dividends, but ...
  4. Rights Offering (Issue)

    An issue of rights to a company's existing shareholders that ...
  5. Shareholders' Equity

    A firm's total assets minus its total liabilities. Equivalently, ...
  6. Protected Cell Company (PCC)

    A corporate structure in which a single legal entity is comprised ...
Related Articles
  1. Evaluating A Company's Capital Structure
    Bonds & Fixed Income

    Evaluating A Company's Capital Structure

  2. Small Caps Boast Big Advantages
    Trading Strategies

    Small Caps Boast Big Advantages

  3. Evaluating Retained Earnings: What Gets ...
    Fundamental Analysis

    Evaluating Retained Earnings: What Gets ...

  4. How To Evaluate A Micro-Cap Company
    Investing Basics

    How To Evaluate A Micro-Cap Company

Hot Definitions
  1. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  2. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  3. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  4. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  5. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  6. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
Trading Center