Capitalization Question:
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Can you please explain the difference between Overcapitalization & undercapitalization?

Answer:

- Overcapitalization is a state where earnings are not sufficient to justify the fair return on the amount of share capital which has been issued by the company whereas undercapitalization is a state where the capital which is owned by the business is much less than the borrowed capital.

- Overcapitalization happens when the actual profits of a company are not enough or sufficient to pay interest to the creditors whereas undercapitalization happens due to over-trading and when the company earn high profits as compared to other industry.

- Overcapitalization shows the rate of return as declining entity whereas undercapitalization shows the rate of return as increasing entity.

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