# Over-capitalisation
## Definition
A situation where a firm has more capital than it needs, or where the firm's assets are worth less than its issued share capital, and earnings are insufficient to pay dividends and interest at fair rates.
## Causes of Over-capitalisation
1. Raising more money through shares/debentures than the company can profitably employ.
2. Borrowing huge amounts at a higher rate than the rate at which the company can earn.
3. Excessive payment for the acquisition of fictitious assets (e.g., goodwill).
4. Improper provision for depreciation, replacement of assets, and distribution of dividends at a higher rate.
5. Wrong estimation of earnings and capitalisation.
## Consequences of Over-capitalisation
1. Considerable reduction in the rate of dividend and interest payments.
2. Reduction in the market price of shares.
3. Resorting to "window dressing" of accounts.
4. Some companies may opt for reorganisation; in extreme cases, matters worsen and the company may go into liquidation.
## Key Indicator
> A firm has a very high capital base but low EPS — this is a classic symptom of over-capitalisation.