Please what are the signs or symptoms of over capitalisation?

This is basically excessive holding of working capital.Basically an entity is holding too much cash and or inventory and not taking advantage of trade credit or other current liabilities to the extent that it could safely do given its historic and or industry conditions.This can be established by making use of comparisons of key ratios with similar companies.The key ratios will be the current ratio,quick ratio,inventory turnover period,accounts receivable and accounts payable periods.Essentially overcapitalization occurs when a business is over invested in its working capital and so not generating as much value as it could otherwise be generating with an adequate amount of working capital.This of course is a value judgement and it I believe an exam question will try to make it clear that overcapitalization is occurring to an entity.

Putting simply there are two concepts that one needs to know

1)over-capitalization= as the word itself suggests, you are over “investing” in working capital than you should, ideally at the cost of your long term investments. Signs of over capitalization would be increased working capital, increased current assets/ increased accounts receivables. alternatively reduced levels of accounts payables etc

2) Over trading: BPP defines it as ” when a company is trying to achieve too much in too little long term investment” This basically means its the exact opposite of over capitalization. Signs: rapid increase in sales, increased receivables t/o period, increase in non-current assets, increase in GP, static levels of asset turnover etc

Hope this helps 🙂