Capitalization Of Profits


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.

BREAKING DOWN '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.

  1. Paid-Up Capital

    The amount of a company's capital that has been funded by shareholders. ...
  2. Rights Offering

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

    A firm's total assets minus its total liabilities. Equivalently, ...
  4. Retained Earnings

    Retained earnings is the percentage of net earnings not paid ...
  5. Capitalization

    1. In accounting, it is where costs to acquire an asset are included ...
  6. Qualitative Analysis

    Securities analysis that uses subjective judgment based on nonquantifiable ...
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