Why do we need to exam whether a company is operating at full capacity?

Expert Solution

Information regarding capacity utilization is important for an investor and an analyst in order to ascertain the following:

Feasibility of increasing operations without incurring capital expenditure for capacity expansion. If the firm is operating in full capacity, further increase in scale of operations will entail capital expenditure and delay in implementation.
If functioning in full capacity without plan for expansion, reason for the same should be ascertained. Because that may signal either lack of prospects of the industry/ activity or the lack of interest for the management in the growth of the firm
If functioning at less than actual capacity, reason for that should be ascertained and verified. Because, under utilization of capacity could be due to various reasons like lack of demand for the products, inefficiency of the management, inadequacy of working capital, non-availability of skilled labor etc.

jeff jeffy answered 1 month ago

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