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.

RELATED TERMS
  1. Capitalization

    Capitalization, in accounting, is when the costs to acquire an ...
  2. Capital Funding

    Capital funding is the money that lenders and equity holders ...
  3. Authorized Share Capital

    The number of stock units that a publicly traded company can ...
  4. Stockholders' Equity

    Stockholders' equity is the remaining amount of assets available ...
  5. Days Working Capital

    An accounting and finance term used to describe how many days ...
  6. Capitalization Structure

    Capitalization structure refers to the proportion of debt and ...
Related Articles
  1. Tech

    Understanding Facebook's Capital Structure (FB)

    Facebook's strong revenue and earnings have allowed solid expansion of the company's equity capitalization, resulting in little debt in its capital structure.
  2. Investing

    Advantages of Maintaining Low Working Capital

    Understand the benefits and advantages of maintaining low working capital as related to liquidity needs, capital allocation and operational efficiency.
  3. Investing

    Understanding Verizon's Capital Structure (VZ)

    Verizon has a highly leveraged capital structure, and this debt capitalization and the company's equity have affected its enterprise value.
  4. Investing

    Google Stock: Capital Structure Analysis (GOOGL)

    Analyze Alphabet's capital structure to determine how it has changed over time and how it compares to similar companies.
  5. Investing

    Gilead Stock: Capital Structure Analysis (GILD)

    Analyze the capital structure of Gilead Sciences to understand the impacts of debt and equity financing. Identify trends and the major drivers of those trends.
  6. Investing

    Target Corp: WACC Analysis (TGT)

    Learn about the importance of capital structure when making investment decisions, and how Target's capital structure compares against the rest of the industry.
  7. Small Business

    Facebook Stock: Capital Structure Analysis (FB)

    Analyze Facebook's capital structure to identify trends and atypical characteristics. Find out why the company uses equity capital and carries no debt.
  8. Know Your Shareholder Rights

    Common-stock owners have numerous privileges and should be vigilant in monitoring a company.
RELATED FAQS
  1. What is the difference between financial capital and economic capital?

    Read about the differences between types of financial capital, which companies use to raise money, and economic capital models ... Read Answer >>
  2. How does a company's capitalization structure affect its profitability?

    Learn about capitalization structure and how the combination of debt and equity a company uses to fund operations can affect ... Read Answer >>
  3. Is there a difference between capital gains and dividend income?

    Selling something for a profit leads to capital gains. A payment made by a corporations to stockholders is a dividend. Both ... Read Answer >>
  4. How does total capital investment influence economic growth?

    Discover the basic relationship between capital investment and economic growth, and why improving the capital structure increases ... Read Answer >>
  5. What are the different ways corporations can raise capital?

    Find out about raising capital for corporations with debt and equity capital. Learn how interest and dividend payments factor ... Read Answer >>
Hot Definitions
  1. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  2. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  3. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  4. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  5. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  6. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
Trading Center