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.
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.