What does 'capital structure' refer to?

The term 'capital structure' refers to the specific mixture of debt and equity that a company employs to fund its operations and support its growth initiatives. This concept is crucial in financial accounting as it highlights how businesses finance their activities, including the balance between using borrowed funds (debt) and shareholders' equity (equity) from issuing shares.

The capital structure is a key aspect for evaluating a company's risk and financial health. It influences a company's overall cost of capital, risk exposure, and flexibility in financial decision-making. A company with a higher proportion of debt may face higher financial risk, especially during economic downturns, while one with greater equity may have more stability but might not be utilizing leverage effectively.

Understanding capital structure is vital for investors and analysts as it provides insights into how a company has positioned itself to meet its funding needs and how it is likely to perform financially under different circumstances.