Overcapitalization and its causes posted by
What is over capitalization? What are its causes?
Capitalization of a company neither should be low or high. It should be suitably
available at the time of need. Over capitalization is a state in which the
earning which are not sufficient to give a good return on the amount of share
capital which has been issued. This is where when total owned and borrowed
capital exceeds the fixed and current assets (it shows losses on the assets
side). The company which comes under this state is like a person who can't
carry his own weight properly. The company which comes under this kind of
influence has many difficulties and not likely to be active until the state is
been corrected. The causes of over capitalization are as follows:
1) Idle Funds: Company may have funds which might not have
been used properly e.g. Money invested in such projects that are giving very
2) Over-valued : Fixed assets may be having higher cost than
that of its actual cost.
3) Value degradation : Fixed assets may have been taken when
the prices were high and when the prices have fallen the value of it may have
fallen but then also the value for the company will be high only.
4) Inadequate Depreciation provision: Fixed assets might not
have adequate provision.