What is capital structure?

Capital structure refers to the way a company finances its overall operations and growth by using different sources of funds. It is the combination of debt and equity that a firm uses to meet its financing needs. Debt includes loans, bonds, or borrowings, while equity represents shareholders' funds, including common stock, preferred stock, and retained earnings. A well-balanced capital structure minimizes the cost of capital and maximizes the value of the firm. Decisions regarding capital structure depend on factors like risk tolerance, profitability, market conditions, and tax benefits. A strong structure supports financial stability, while an imbalanced one can lead to financial stress or difficulty in sustaining long-term operations.