In a fundamental analysis context, what is ‘capital structure’?

Capital structure refers to the particular way a company finances its overall operations and growth through a combination of debt and equity. This concept is fundamental in finance as it influences the risk and value of the company, impacting everything from the cost of capital to the overall financial stability and leverage of an organization.

When discussing capital structure, it’s important to understand that equity represents ownership in the company (through shares) while debt refers to borrowed funds that need to be repaid with interest. A strong capital structure strikes a balance between these two financing methods, allowing a company to maximize its value and minimize its cost of capital, which can ultimately enhance shareholder wealth.

Effective capital structure management can lead to increased investment flexibility and financial resilience. Companies often aim for an optimal capital structure that supports their particular business model, industry practices, and growth strategies, making it a critical area of analysis for investors and analysts alike.