Capitalisation is combination of owner’s capital and borrowed capital. That means, it tells about total fund invested in a company. Share capitals, debentures, loans etc.
Capitalisation is generally classified as follows −
In this, profits are not enough to pay interest on debentures and dividends to shareholders over a period of time. That means, amount generated is used to raise capital than required capital, which results decline in rate of returns.
Some of the causes for over capitalisation are as follows −
Some of the effects of over capitalisation are as follows −
Company will earn high profit than estimated, which gives additional funds to the company for expansion in form of profits. Goodwill of the company increases and return of capital increases.
Some of the causes for under capitalisation are mentioned below −
Some of the effects of under capitalisation are mentioned below −