Get an answer for ‘Overcapitalization and Undercapitalization are both unhealthy signs for Distinguish between the marketing concept and the selling concept. This article will help you to differentiate between Over-Capitalisation and Under- Capitalisation. 1. Over-capitalisation involves a great-strain on the financial. Overcapitalization A company is said to be overcapitalized, when its total capital ( both equity and debt) exceeds the true value of its assets.
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A company is said to be overcapitalized when the aggregate of the par value of its shares and debentures exceeds the true value of its fixed assets. In other words, over capitalisation takes place when the stock is watered or diluted. It is wrong to identify over capitalisation with excess of capital, for there is every possibility that an over capitalised concern may be confronted with problems of liquidity.
The current indicator of over capitalisation is the earnings of the company. If the earnings are lower than the expected returns, it is overcapitalised. Overcapitalisation does not mean surplus of funds.
It is quite possible that a company may have more funds and yet to have low earnings. Often, funds may be inadequate, and the earnings may also be relatively low.
In both the situations there is over capitalisation.
Over-Capitalisation and Under-Capitalisation (Differences)
Over capitalisation may take place due to — exorbitant promotion expenses, inflation, shortage of capital, inadequate provision of depreciation, high corporation overcapitalizxtion, liberalised dividend policy etc. Over capitalisation shows negative impact on the company, owners, consumers and society. Under capitalisation is just the reverse of over capitalisation, a company is said to be under capitalised when its actual capitalisation is lower than its proper capitalisation as warranted by its earning capacity.
This happens in case of well established companies, which have insufficient capital but, large secret reserves in the form of considerable appreciation in the values undercapitalixation fixed assets not brought into books. In case of such companies, the dividend rate undercapitalizatiin be high and the market value of their shares will be higher than the value of shares of other similar companies.
The state of under capitalisation of a company can easily be ascertained by comparing of a book value of equity shares of the company with their real value. In case real value is more than the book value, the company is said to be under capitalised.
Difference between Over Capitalization and Under Capitalization of Company
Under capitalisation undercapitalizagion take place due to — under estimation of initial earnings, under estimation of funds, conservative dividend policy, windfall gains etc. Under-capitalisation has some evil consequences like creation of power competition, labour unrest, consumer dissatisfaction, possibility of manipulating share value etc. You must be logged in to post a comment.
Meaning, Causes and Effect of Over-Capitalization. Meaning, Effects with Examples Financial Management. Leave a Reply Click here to cancel reply.