Capital Structure & Financing

Capital Structure & Financing

Every business requires funds to be able to meet its long-term asset needs and short-term working capital requirements. Debt and Equity are the two primary sources of capital for a business. Capital structure is the combination of equity and debt that is put into use by a company in order to finance the overall operations of the company and for its growth. Optimal capital structure is the perfect mix of debt and equity financing that helps in maximizing the value of a company while at the same time minimizing its cost of capital.

A company’s capital structure is helpful in understanding its current financial health, risk profile and compatibility with specific investment or acquisition strategies. Investors will look at the mix of debt and equity to help them assess the viability of a potential investment or target, as well as its potential for growth. In assessing risk, a company’s debt is compared to shareholder’s equity to see how levered the company is and whether there would be enough equity to cover debt obligations. Understanding a company’s capital structure can also be useful in determining the types of financial services they may need now or in the future. With insight into a company’s capital structure, you can identify likely buyouts, acquisition targets and debt refinancing or recapitalization opportunities.

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