CAPITAL STRUCTURE

1. Definition of Capital Structure

 The capital structure is the particular combination of debt and equity used by a company to
finance its overall operations and growth. Debt comes in the form of bond issues or loans,
while Equity may come in the form of common stock, preferred stock, or retained earnings.
Short-term debt is considered to be part of the capital structure by accounts payable and
accruals are not included.
A. Debt consists of borrowed money that is due back to the lender, commonly with
interest expense
B. Equity consists of ownership rights in the company, without the need to pay back
any investment
C. The Debt-to-Equity (D/E) ratio is useful in determining the riskiness of a company’s
borrowing practices.
 Debt / Equity ratio:

DEBT
DEBT-TO-EQUITY (D/E) RATIO =
EQUITY
 The debt-to-equity (D/E) is a measure of the degree to which a company if
financing its operations through debt versus wholly-owned funds (equity).
 In general, a company with a high D/E ratio is considered a high risk to lenders
and investors because it suggests that the company is financing a significant
amount of its potential growth through borrowing.