Investopedia

Continue to Site »

Undercapitalization

Filed Under » ,
Dictionary Says

Definition of 'Undercapitalization'

When a company does not have sufficient capital to conduct normal business operations and pay creditors. This can occur when the company is not generating enough cash flow or is unable to access forms of financing such as debt or equity. If a company can't generate capital over time, it increases its chance of going bankrupt as it loses the ability to service its debts. Undercapitalized companies also tend to choose high-cost sources of capital, such as short-term credit, over lower-cost forms such as equity or long-term debt.

Investopedia Says

Investopedia explains 'Undercapitalization'

Being undercapitalized is a trait most often found in young companies that do not adequately anticipate the start-up costs associated with getting a business up and running. It can also occur in large companies that take on significant amounts of debt and suffer from poor operating conditions.

If undercapitalization is caught early enough, and if the company has sufficient cash flows, it can replenish it coffers by issuing stock or debt, or obtaining a long-term revolving credit arrangement with a lending group. However, if a company is unable to produce net positive cash flow or access any forms of financing, it is likely to go bankrupt.

Articles Of Interest

  1.

    Evaluating A Company's Capital Structure

    Learn to use the composition of debt and equity to evaluate balance sheet strength.

  2. The Dirt On Delisted Stocks

    Listed securities are "the cream of the crop". Find out how a firm can lose that status and why you should be wary.

  3. An Overview Of Corporate Bankruptcy

    If a company files for bankruptcy, stockholders have the most to lose. Find out why.

  4. The Basics Of Financing A Business

    From debt financing to equity financing, there are numerous ways to fund a business startup. But which is the best?

  5. Capital Budgeting

    Learn the process through which businesses determine whether projects are worth pursuing.

  6. Bankruptcy

    Learn what happens when an individual or an organization files for bankruptcy.

  7. 6 Decisions That Cost Companies Millions

    Here are some of the worst business decisions of all time, made across a broad range of sectors and industries.

  8. A New Plan To Prevent Future Bailouts

    This new and innovative plan by the FDIC could help the government avoid the next bailout.

  9. The Evolution Of Video Rental Stocks

    Video rental customers have gone from using video stores to streaming selections available at home. Here's how it happened.

  10. 4 TARP Recipients That Made A Profit

    New estimates show that the TARP program may show a profit of $23.6 billion over the life of the bailout program.
comments powered by Disqus
Marketplace
Hot Definitions

  1. Cost-Push Inflation

    A phenomenon in which the general price levels rise (inflation) due to increases in the cost of wages and raw materials.

  2. Happiness Economics

    The formal academic study of the relationship between individual satisfaction and economic issues, such as employment and wealth.

  3. Affluenza

    A social condition arising from the desire to be more wealthy, successful or to "keep up with the Joneses." Affluenza is symptomatic of a culture that holds up financial success as one of the highest achievements.

  4. Icarus Factor

    The term Icarus factor describes a situation where managers or executives initiate an overly ambitious project which then fails. Fueled by excitement for the project, the executives are unable to reign in their misguided enthusiasm before it is too late to avoid the failure.

  5. Angelina Jolie Stock Index

    An index made up of a selection of stocks from companies associated with actress Angela Jolie.

  6. Consequential Loss

    The amount of loss incurred as a result of being unable to use business property or equipment.
Trading Center