Capital structure – Explained
Capital structure refers to the way a company finances its operations and growth by using a mix of different types of funding sources, such as debt (borrowing money) and equity (selling ownership shares).
A company’s capital structure is important because it affects its financial health, risk profile, and ability to grow and innovate. For example, taking on more debt can increase a company’s financial leverage, which can amplify returns when things are going well but can also increase risk if the company’s profits decline. On the other hand, selling equity can dilute ownership and control, but it can also provide capital without adding to the company’s debt burden.
A company’s capital structure is typically expressed as a ratio of debt to equity, and the specific mix of funding sources can vary depending on factors such as the company’s industry, stage of growth, and risk appetite. Finding the right capital structure is an important aspect of corporate finance and can have a significant impact on a company’s long-term success.