Paying Dividends Or Issuing Bonus Shares

Paying Dividends Or Issuing Bonus Shares: A Prudent Move

It makes sense to return cash to investors in the form of dividends or recapitalizing part of the reserves into paid-up capital when the company cannot utilize the reserves well enough to give significant growth in the revenue and profit. Holding excess cash would only lead to diminishing of return on capital employed (ROCE). If a company is high on cash (represented by general reserve), which is not being optimally utilized, then the net profit/capital employed ratio would come down as reserves form a component of capital employed. Thus it’s better to distribute the company’s gain among the shareholders.