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Local companies seek to increase capital from retained profits

In a novel approach within the local market, companies have approached the Ministry of Commerce and Industry to augment their capital using retained profits rather than resorting to the conventional method of soliciting current shareholders for additional subscriptions.

Sources familiar with the matter informed Al-Jarida that the Ministry of Commerce has given nod for the request from these companies to bolster their capital through retained profits accumulated over preceding years, subject to specified conditions and regulatory frameworks.

Retained profits represent the portion of net profits withheld by the company instead of disbursing them to shareholders in the form of stock dividends. Instead, these profits are earmarked for investment, expansion, or debt repayment.

When a company opts to retain profits, or a portion thereof, it is obliged to record the value of these retained profits in the shareholders’ equity section of its financial statements. Typically, management is entrusted with the decision-making process regarding the distribution or retention of profits based on the company’s financial health and future requirements.

Companies may choose to reserve profits for various purposes, including mergers and acquisitions, expansion of operations geographically or in terms of scale, investment in new products or services, research and development, marketing initiatives, debt settlement, and bond acquisitions.

It’s worth noting that dividends play a crucial role in determining the final value of retained earnings. Dividends can be distributed as cash or stock dividends, both of which impact retained earnings differently. Cash dividends result in a decrease in the company’s liquid assets, while stock dividends are allocated to common stocks and available capital accounts.

Retained profits encompass profits accumulated from previous financial periods and are included in the equity section of the balance sheet. They differ from retained earnings, which represent profits from the current financial period alone. While retained profits provide insight into the company’s historical performance, total retained earnings offer a more current depiction by incorporating both past and present financial achievements.

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