What does "capital structure" refer to?

Capital structure refers to the mix of debt and equity financing that a company uses to fund its operations and growth. This concept is essential in finance because it determines how a company finances its overall operations and growth through different sources of funds. A company's capital structure impacts its overall risk profile, cost of capital, and financial flexibility.

In terms of financing, debt generally includes loans and bonds that must be repaid with interest, while equity refers to ownership stakes in the company, such as stocks. The balance between these sources of capital is crucial because it directly affects a company's financial health and its ability to expand or invest in new projects.

Understanding capital structure helps in evaluating a company's financial strategies and its ability to optimize its funding to achieve long-term objectives. The use of the appropriate mix can enhance shareholder value and ensure a sustainable growth trajectory.