|Over-trading and under-trading are facets of over and under-capitalization. Over trading is a curse to the business.
Over Trading :
A company which is under-capitalized will try to do too much with the limited amount of capital which it has. For example it may not maintain proper stock of stock. Also it may not extend much credit to customers and may insist only on cash basis sales. It may also not pay the creditors on time. One can detect cases of overtrading by computing the current ratio and the various turnover ratios. The current ratio is likely to be very low and turn over ratios are likely to be very higher than normally in the industry concerned.
Under Trading :
Under-trading is the reverse of over-trading. It means keeping funds idle and not using them properly. This is due to the under employment of assets of the business, leading to the fall of sales and results in financial crises. This makes the business unable to meet its commitments and ultimately leads to forced liquidation. The symptoms in this case would be a very high current ratio and very low turnover ratio. Undertrading is an aspect of over-capitalization and leads to low profit.