Capitalization Of Profits
Capitalization of profits is the use of a corporation's retained earnings (RE) to pay a bonus to shareholders in the form of dividends or additional shares. Large capitalization, medium capitalization, or small capitalization, more commonly called large cap, medium cap, and small cap, is a way to lump companies into categories based on their size or market cap. So, capitalization of profits implies that a company is transforming its cash reserves into assets of value, and transferring those assets to shareholders. Capitalization of profits is the use of corporate reserves to pay a bonus to shareholders in the form of cash or additional shares. Capitalization of profits is the use of a corporation's retained earnings (RE) to pay a bonus to shareholders in the form of dividends or additional shares.
What Is Capitalization Of Profits?
Capitalization of profits is the use of a corporation's retained earnings (RE) to pay a bonus to shareholders in the form of dividends or additional shares. It is a reward to shareholders, distributed in proportion to the number of shares each owns.
Understanding Capitalization Of Profits
Capital means assets of value. So, capitalization of profits implies that a company is transforming its cash reserves into assets of value, and transferring those assets to shareholders.
Alternatively, the company can return some or all of that profit to its shareholders, in the form of cash dividends or new shares. The capitalization of profits by issuing additional shares has no impact on a corporation's book value. It merely transfers funds from RE, or profits, to assets for shareholders. In that sense, the company is using money but not losing it.
There is always pressure on a company to use its profits, and using them to reward shareholders is always a popular option.
A corporation may be limited by its own articles from issuing bonus shares above a certain amount. In such cases, the corporate officers simply change the articles to raise the limit.
Other Uses of Capitalization
The word capitalization has a bewildering number of uses in the financial world. In general, it means turning something into money or providing money. For instance, investors provide a company with capitalization by buying shares of its stock.
A few of the more common usages of the term capitalization include:
Related terms:
Accounting
Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of a business to oversight agencies, regulators, and the IRS. read more
Additional Paid-In Capital (APIC)
Additional paid-in capital is the excess amount paid by an investor above the par value price of a stock during an initial public offering (IPO). read more
Balance Sheet : Formula & Examples
A balance sheet is a financial statement that reports a company's assets, liabilities and shareholder equity at a specific point in time. read more
Bonus Issue
A bonus issue is an offer of free additional shares to existing shareholders. read more
Book Value : Formula & Calculation
An asset's book value is equal to its carrying value on the balance sheet, and companies calculate it by netting the asset against its accumulated depreciation. read more
Capital Dividend
A capital dividend is a payment to shareholders that is drawn from a company's paid-in-capital or shareholders' equity. It is usually a sign of trouble. read more
Capital : How It's Used & Main Types
Capital is a financial asset that usually comes with a cost. Here we discuss the four main types of capital: debt, equity, working, and trading. read more
Capitalization
Capitalization is an accounting method in which a cost is included in the value of an asset and expensed over the useful life of that asset. read more
Cash Reserves
Cash reserves refer to the money a company or individual keeps on hand to meet short-term and emergency funding needs. read more