Overcapitalization and its causes

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Overcapitalization and its causes


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Overcapitalization and its causes posted by Rajani Sharma

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 low profits.

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. 



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