August 21, 2019

What are the types of Capitalisation?

Over Capitalisation

  • Refers to that state of affairs when earning of a company do not justify the amount of capital invested in its business.
  • A company is over capitalised when its earnings are not large enough to yield a fair return on the amount of stock and bonds that have been issued.
  • Over capitalisation means more capital than actually required.
  • Over capitalisation may occur when the amount of shares, debentures, public deposits and loans exceed the current value of assets.
  • Over capitalisation is not exactly same as excess of capital.
  • Over capitalisation arises when the existing capital of a firm is not effectively utilized with the result that there is a fall in the earning capacity of the company.
    • Acquiring of fictitious assets like goodwill at high prices.
    • Acquiring assets during inflationary period.
    • Showing assets at increased value due to lack of proper depreciation policy.
  • The main sign of over capitalisation is fall in the rate of dividend and market value of shares of the company in the long run.
  • When a company has consistently been unable to earn the prevailing rate of return on its outstanding securities (considering the earnings of similar companies in the same industry and the degree of risk involved) it is said to be over capitalised.

Under Capitalisation

  • A company is said to be under capitalised when it is earning exceptionally higher profits as compared to other companies or the value of its assets is significantly higher than the capital raised.

Leave a Reply

Your email address will not be published. Required fields are marked *