Meaning of over capitalisation.. The Symptoms of over capitalisation.

A company is said to be over capitalised when it's actual profits are not sufficient to pay interest dividends at proper rates. An over capitalised company is enable to pay a fair return on its investment.

              A company is over capitalised only because it capital funds are not effectively or profitably employed. As a result there is a fall in earning capacity of company and in the rate of dividends to be paid to its shareholder as well as a fall in the market value of shares.

            The chief sign of over capitalisation is therefore fall in the rate of dividend over longtime. In actual practice, over capitalisation have been found short of funds.

Definition of Over capitalisation:

Prof Bonneville and Dewey and Kelly's       " when a business is unable to earn a fair return on its outstanding securities it is over capitalised."

Prof. Hougland," when aggregate of the par values of stocks and bonds outstanding exceeded the true value of the fixed assets, the corporation is said to be over capitalised."

Prof Crerstenburg, " A corporation is over capitalised when it's earning are not large enough to yield a fair return on the amount of stocks and bonds that has been issued."

             The analysis of the above definition revealed that Over capitalisation refers to dark State of affairs where earning of the corporation do not justying the amount of capital investment in business.

                A company is not over capitalised from the very beginning. The State of over capitalisation develops offer sometime. It is also clear that a company is said to be over capitalised if it fails to pay a proper rate of dividend over a long period of time. It represents a chronic disease and it's persistence inability to earn a proper rate of return on its investment.

Symptoms of over capitalisation:

(a) High proprietory Ratio:  This Ratio is calculated by dividing shareholders fund by total asset of the concern.

PR = shareholder funds

             Total asset

If this ratio is found to be high it may be an indication of over capitalisation.

(b) Low earning capacity:  If the earning capacity of a business is low as compared to the amount of capital investment, it is a indication of over capitalisation.

(c) Value of asset:  In case the real or market value of firm's asset is lower than there book value, it is the another symptoms of over capitalisation.

(d) Unnecessary investment of funds: If there is unnecessary investment of funds in fixed asset which are excess of its actual needs it may an indicator of over capitalisation.

(e) Earnings per share: If the earnings per share is found to be inadequate it is a symptoms of over capitalisation.

(f) Market value of shares:  Lower market value of share than the book value of shares over a long period is another symptoms of over capitalisation.