What Does Capital Structure Mean?
The combination of a company’s long-term debt, specific short-term debt, common equity, and preferred equity; the capital structure is the firm’s various sources of funds used to finance its overall operations and growth. Debt comes in the form of bond issues or long-term notes payable, whereas equity is classified as common stock, preferred stock, or retained earnings. Short-term debt such as working capital requirements also is considered part of the capital structure. Investopedia explains Capital Structure The proportion of short-term and long-term debt is considered in analyzing a firm’s capital structure. When people refer to capital structure, they most likely are talking about a firm’s debt/equity ratio, which provides insight into how risky a company is. Usually a company financed heavily by debt poses greater risks because it is highly leveraged.
