What is 'Capitalization Of Profits'

The capitalization of profits refers to the process of converting a company's retained earnings, which represent the profits held in the business over time, into capital stock. The capitalization of profits process involves issuing a stock dividend, or bonus shares, to existing shareholders. This allocation is done proportionally to existing stockholder ownership levels, similar to a rights issue.

BREAKING DOWN 'Capitalization Of Profits'

The 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 for future growth initiatives.

More generically, the capitalization of anything refers to the process of turning something into capital. The term capital possesses a challenge as well, as it's come to mean a number of things within business and capital markets. However, in this instance, the capitalization of profits: capital refers to a corporation's shareholders' equity and the capitalization of profits refers to the process of turning the corporation's retained earnings into additional shares in its capital stock, which will be distributed to existing shareholders.

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