What does the term 'capital structure' refer to?

The term 'capital structure' refers to the mix of debt and equity financing used by a firm. This aspect is crucial for understanding how a company funds its operations and growth. A company's capital structure reflects the financial decisions made regarding how to raise capital, and it significantly influences its risk profile, cost of capital, and overall financial stability.

Debt financing often involves borrowing funds that must be repaid over time, typically with interest. In contrast, equity financing involves raising capital through the sale of shares or ownership stakes in the company. A balanced capital structure can help a firm leverage its financing effectively, optimize its capital costs, and manage risk.

In assessing capital structure, various financial metrics and ratios can be employed, such as the debt-to-equity ratio, which provides insights into the relative proportions of debt and equity a company is utilizing. This balance is essential for long-term success and can impact investor confidence, credit ratings, and the ability to pursue strategic opportunities. Exploring capital structure also opens discussions on financial strategy, including how changes in interest rates or market conditions might affect a company's financing choices.