What does 'capital structure' refer to?

Capital structure refers to the way a company finances its assets, specifically through a combination of debt and equity. This concept is essential in understanding how a company structures its financial resources to support its operations and growth.

A well-defined capital structure enables a company to balance risk and potential returns. Debt represents borrowed funds that the company must repay, usually with interest, while equity represents ownership in the company, including shares held by shareholders. The proportion of debt to equity in a company's capital structure affects its overall risk profile and cost of capital, impacting decision-making regarding investments and growth strategies.

Understanding capital structure allows stakeholders to assess a company's financial health, its ability to leverage debt for expansion, and its overall strategy in managing financial risks. This is crucial for investors, creditors, and management as they evaluate the company's financial strategies and performance.