Capital structure refers to the organizational form of an enterprise or institution in terms of financing and capital operation. It focuses on the capital** and investment direction of a business or institution, as well as the proportional relationship between equity and liability. Below I will explain each aspect of the capital structure one by one, and give corresponding examples to illustrate.
1.Ratio of equity to liabilities:
A key aspect of the capital structure is the proportional relationship between the equity and liabilities of a business or institution. Equity refers to the ownership capital of a business or institution provided by shareholders or partners, while liabilities refer to the borrowed capital of the enterprise or institution. The ratio of equity and liabilities reflects the preference and risk tolerance of a company or institution in terms of financing.
For example, a company with a relatively high equity ratio, i.e. a large proportion of shareholders' capital to total capital, may mean that the company has less debt and therefore a lower debt risk. Conversely, if the company's debt ratio is relatively high, i.e., debt is a large proportion of total capital, it may mean that the company has a higher debt risk.
2.Relationship between long-term and short-term funds:
The capital structure also involves the interrelationship between long-term and short-term funds. Long-term funds are generally used for long-term investment projects and capital expenditures of enterprises, while short-term funds are mainly used for the daily operations and short-term debt repayment of enterprises.
For example, in manufacturing, companies may need to invest in the purchase of new equipment and machinery, which requires long-term financial support. And in order to pay workers' wages and buy raw materials, enterprises need short-term financial support. The rational arrangement of the capital structure should take into account the balance between long-term and short-term funds to ensure the normal operation and sustainable development of the enterprise.
3.Proportional relationship between various financing methods:
The capital structure also involves the proportionality of different financing modalities. Businesses can raise funds through the issuance of **, bonds, attracting investment, etc.
For example, a company may choose to issue a ** to attract shareholder investment to increase equity capital. Another business may prefer to issue bonds to raise capital in order to increase its debt capital. The choice of capital structure depends on factors such as the needs of the business and the cost of financing.
4.Proportional relationship between different investors:
The capital structure also involves the proportional relationship between different investors. The proportional relationship between different investors reflects the ownership structure and management control relationship of the enterprise or institution.
For example, a business may be wholly owned by one person or a company, which means that one investor controls all the interests. The other company may be jointly owned by multiple owners, each of whom owns a different percentage of shares. The determination of the capital structure should take into account the interests of individual investors and the distribution of power.
5.The proportional relationship between the capital ** structure and the investment structure:
The capital structure also involves the proportional relationship between the capital structure and the investment structure. The capital structure refers to the proportion of funds received by the enterprise or institution from different projects, and the investment structure refers to the proportion of the enterprise or institution that invests funds in different projects or fields.
For example, one investor may invest most of their money in one business or project, while another business may spread their money across multiple projects or sectors. The reasonable arrangement of the capital structure should take into account the matching and balance of capital and investment direction to ensure the steady development of the enterprise.
To sum up, capital structure is a complex concept that involves multiple aspects and factors. When formulating a capital structure, an enterprise or institution should fully consider its own needs, risk tolerance, financing costs and the interests of stakeholders. A proper capital structure can help a business or institution achieve sustainable development and long-term value creation. Finance